Real-world asset tokenization puts everything on blockchain (feat. Kinto)

Ramon Recureo, co-founder and CEO of Kinto, joins The Agenda podcast to explain how tokenized real-world assets open up new opportunities for institutional and retail investors and how tokenization will eventually integrate blockchain into all areas of the financial industry.

The Agenda is brought to you by Cointelegraph and hosted/produced by Ray Salmond and Jonathan DeYoung. Follow Cointelegraph on X (Twitter) at @Cointelegraph, Jonathan at @maddopemadic and Ray at @HorusHughes. Jonathan is also on Instagram at @maddopemadic, and he makes the music for the podcast — hear more at madic.art.

Follow Ramon Recuero on X at @ramonrecuero.

Check out Cointelegraph at cointelegraph.com.

Timestamps:
(00:00) - Introduction to The Agenda podcast and this week’s episode
(01:38) - What are real-world assets (RWAs), and what is Kinto?
(08:37) - How do RWAs and Kinto differ from Robinhood and Fidelity?
(14:43) - How secure are tokenized assets?
(16:24) - How do we know RWAs are not another “crypto bubble?”
(22:38) - RWAs unlock fragmented liquidity in assets
(23:57) - DeFi is actually “safer” than traditional finance
(31:30) - RWAs will unlock trillions, but when?
(33:44) - Are there limitations to tokenizing everything?
(46:30) - Are RWAs and KYC laws compatible?
(49:50) - The role of governance at Kinto

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The views, thoughts and opinions expressed in this podcast are its participants’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph. This podcast (and any related content) is for entertainment purposes only and does not constitute financial advice, nor should it be taken as such. Everyone must do their own research and make their own decisions. The podcast’s participants may or may not own any of the assets mentioned.

Chapters

• 0:00 Introduction to The Agenda podcast and this week’s episode
• 1:38 What are real-world assets (RWAs), and what is Kinto?
• 8:37 How do RWAs and Kinto differ from Robinhood and Fidelity?
• 14:43 How secure are tokenized assets?
• 16:24 How do we know RWAs are not another “crypto bubble?”
• 22:38 RWAs unlock fragmented liquidity in assets
• 23:57 DeFi is actually “safer” than traditional finance
• 31:30 RWAs will unlock trillions, but when?
• 33:44 Are there limitations to tokenizing everything?
• 46:30 Are RWAs and KYC laws compatible?
• 49:50 The role of governance at Kinto

Transcript

[00:00:00] Ray Salmond: Crypto is for everyone, not just rocket scientists, venture capitalists, and high IQ developers. Welcome to The Agenda, a Cointelegraph podcast that explores the promises of crypto, blockchain and Web3 and how regular people level up with technology.

Discussions about the tokenization of real-world assets have been a steady topic of discussion in the fintech world for the past year. And a few months ago, BlackRock CEO Larry Fink announced that the multitrillion-dollar asset manager would begin to explore the RWA space.

[00:00:38] Jonathan DeYoung: If you take a quick look at the data on the dashboard at RWA.xyz, you can easily see that the growth of the real-world assets sector entered the multibillion-dollar range over the past year, but the actual process of tokenizing tangible assets on blockchains can be difficult to grasp.

[00:00:57] Ray Salmond: At The Agenda, we’ve been curious about exactly what can be brought onchain, how fractionalization works, the associated risks and legal concerns, along with who exactly are RWAs for.

[00:01:11] Jonathan DeYoung: To provide some clarity on these questions and to bring us all up to speed on RWAs, today we’re happy to speak with Ramon Recureo, who’s the co-founder and CEO of Kinto, an Ethereum-based layer 2 platform that eases the process of onboarding investors into real-world assets. And I’m sure it does much more, and I’m sure we’ll hear all about it. So, thank you for joining us, Ramon.

[00:01:37] Ramon Recureo: Thank you for having me. It’s a pleasure.

[00:01:38] Jonathan DeYoung: Let’s get some of the basic questions out of the way so that everybody who’s listening is on the same page. I don’t really know much about RWAs, except that it’s a buzzword in crypto, that they are, just that real-world assets that have been tokenized in some way. So, can you give us the kind of basic, fundamental explanation, first, of what is an RWA? And then, you can talk about what exactly is Kinto and how does it interact with this RWA world.

[00:02:07] Ramon Recureo: Yeah, RWA, funnily enough, is a term that nobody likes, but everyone keeps using it. It can distract for some reason.

[00:02:13] Jonathan DeYoung: It’s like NFT.

[00:02:15] Ramon Recureo: Yeah, yeah, exactly the same. It’s a really good comparison, basically means real-world assets. And it was created to contrast with digital native assets like Bitcoin, Ethereum that only exist inside crypto. So, real-world assets right now, they are… What most people mean by real assets are the following categories first: treasuries or bonds, then lending, then also equities, so on. And then things like mortgages, even deeds in the future. But for now, the biggest market is treasuries. And that’s where the BlackRock fund that Ray mentioned a few moments ago fits in.

[00:02:53] Jonathan DeYoung: And so where does Kinto fit into all of this? And what exactly… we gave you, our listeners, the one sentence description, but I’m sure you have a lot more to add to that.

[00:03:03] Ramon Recureo: Yep. I’ll try to make it brief. Basically, Kinto is a layer 2 similar to Arbitrum or Optimism that is on the Ethereum network, but Kinto has two main differences with every other L2. First is that we have KYC at the chain level, which makes the chain level resistant, gives developers on the chain all this compliant tooling to be able to emit and issue assets that are compliant with many different jurisdictions, which is key for many assets. And the other difference that we have on Kinto is that we enforce account abstraction. So we basically force every user to have a really secure wallet to make sure they don’t get a scam, they don’t get hacked, they don’t get robbed. So Kinto, because of these two modifications, can offer an order of magnitude safer experience for users.

[00:03:51] Jonathan DeYoung: And is it specifically designed for RWAs, or does it just happen to be a platform that works well for it?

[00:03:59] Ramon Recureo: It is designed specifically for finance and DeFi, and the way we see Kinto is that Kinto is going to help users access the best opportunities from the whole Ethereum ecosystem, both in digital native assets like Ethereum, Bitcoin, staking that kind of assets. But then, on Kinto, we’re going to mint the assets that need Kinto. And these are assets that require these compliance checks. And Kinto is going to provide these KYC, AML out of the box for issuers and developers. And then developers can combine the assets from both worlds to create portfolios, to create vaults, to create a diversified offering for investors.

[00:04:37] Jonathan DeYoung: Gotcha. So you mentioned treasuries. Do you have any other examples of some of the products that are currently built on Kinto, planning to be built on Kinto, or maybe some of the other use cases that you could imagine somebody could build on Kinto?

[00:04:52] Ramon Recureo: Yeah. So we just launched two weeks ago. So for now, we are now during this summer onboarding 10 to 15 different products right now. Last week, we launched Mountain Protocol that is this stablecoin that gives users treasury yield similar to USDC. But, for example, when you hold USDC, you don’t get any of the yield. Just Circle gets it. Uh, this stablecoin called USDM from Mountain Protocol gives you still a stablecoin but also gives you the yield from the treasuries to the users. So that’s something that we launched last Thursday. We’re going to launch a few more Treasury products. And then what we’re really excited to launch this month is to launch Tokenize.it because right now, for example, many people in crypto have a part of their portfolio, maybe an irresponsible part of their portfolio in crypto, but they probably still have a small part in Robinhood, a small part in Fidelity to buy stocks, to buy Nvidia to buy Coinbase, to buy Robinhood. And the problem is like you need to wait 3 or 4 days when you want to switch your funds from one place to the other. You need to withdraw it and send it to Coinbase and from Coinbase send it to a bank. Then, from your bank, you can send it to your broker. And then you can do the transactions you want to perform. So this is not efficient. And this is something that blockchains have been designed to perform really well, that is instant settlement. Reduce the intermediary layers so you can achieve much more efficiency. So, in Kinto, you’re going to be able to buy your favorite stocks directly onchain. And then later you will be able also to use them as collateral and maybe even do pairs on these stocks, which unlocks many, many interesting use cases.

[00:06:28] Jonathan DeYoung: So I have a couple I don’t know if they’re technical questions about the blockchain. And then I’ll pass it to Ray, who I know has some questions about RWAs and the markets, and all that fun stuff. So, looking at your website and just talking to you a second ago, you were mentioning that it’s extra secure for—  the wallets are extra secure. And I was reading that the wallets are non-custodial. Only you can access your funds. There’s no need to worry about losing your keys. So how does that work, exactly?

[00:06:59] Ramon Recureo: Yeah. To provide a bit more context, the standard in security right now is what people call a multisig that usually people do through a Gnosis Safe. That basically means that you put you have like three different accounts or crypto addresses, and then three different people need to sign a transaction in order to send it. So that’s what many, many projects use to handle the treasury, or maybe even layer 2s. You will hear, oh, this is not real, this is just a multisig, when it’s pejorative. Or they say that about Blast when they launched. So, for us, we started that, just the starting point. We’re giving every user not just your typical MetaMask wallet that you need to worry about the seed phrase, the passkey, and storing all that. And users don’t even understand how it works. We are creating from every user automatically a smart contract wallet, which means that your wallet is already a smart contract. And then, we are letting you select different keys. The first one, we are tying it directly to your fingerprint so you can use your phone. You can use also 1Password or services like that. And then you can add additional keys for extra security, like your hardware Ledger or Trezor or something like that. And then the cool thing is, because we have KYC’d everyone, in the case that you lose everything, we can even restart a full recovery where you will need to wait a few days to make sure this is not someone trying to steal your assets, but then you can re-KYC again and then verifying your identity, and then you can set up a new set of keys, but the user is the only one that can access the funds because we don’t have your keys. The only thing is like there is an admin switch that will let you, after successfully requesting yourself, set up new keys.

[00:08:37] Ray Salmond: Okay, so you mentioned a few things about tokenized equities or tokenized stocks. I’m wondering how is that different from just buying the stocks in an app from your standard broker. Are these synthetics? Are they perpetual contracts? How far away is the tokenized equity from, quote-unquote, the real thing that I get through my Fidelity, Charles Schwab or Robinhood account?

[00:09:04] Ramon Recureo: Yeah. The partner we cannot disclose much yet because we haven’t announced it. But the partner we’re working with matches 1 to 1. Whatever order they get on the blockchain, they automatically go to buy it. And they have the log and the transparency. So they actually whenever if you buy two shares of Nvidia, they are going to buy those two shares of Nvidia and segretated them for you. And then they’re going to issue you this token that represents that you hold these two shares, [inaudible]. The cool thing is like because you are now on the ecosystem, then you have this asset, this tokenized asset, and then you can use that token to access other DeFi services on Kinto, like deposit with a lending protocol, so you can use it as collateral or even borrow from it.

[00:09:44] Ray Salmond: Right. I want to talk more about that later. Whenever I hear about asset collateralization in the sense of DeFi, it makes me a little bit nervous for a few reasons, but we can chat more about that later. So I’m also hearing a lot. Like whenever I hear about RWAs, it’s either a discussion about stablecoins and collateralizing stablecoins or it’s about tokenized treasuries. I don’t understand why there’s a need for tokenized treasuries and what’s the benefit of doing that. So, as an example, I have some US bonds from like 15 years ago. They’re here in my house. They’re on paper. I can go to ustreasury.gov and see how much they’re worth. I can buy more treasuries, limited duration or longer duration, on that same website. And buy and sell them there and see them. So, what’s all the rage about tokenized treasuries? Because I’ve seen it also at RWA.xyz, like the TVL or the amount of assets that have been brought onchain or invested into these tokenized treasuries, like it’s in the multiple billions of dollars. So clearly, there’s something here. Is it utility? Is it just another option for investment? What’s going on here?

[00:10:57] Ramon Recureo: Yeah. For context, bonds are the biggest asset class in the world. So, and specifically, US Treasurys have the biggest market cap. And this is for two reasons. Because the US, good or wrong, is considered the safest market. And US Treasurys are considered the pristine collateral. And right now, in the last few years, because of the macro that, the rates are 5%. Many institutions, many risk averse investors, have rushed to take advantage of these treasuries through many different instruments like money market funds. So you have seen that those in Vanguard, Fidelity explode. Then, in Kinto, I mean, in blockchain, treasuries are getting popular within the same demographic that is kind of risk-averse. For example, many treasuries of DeFi protocols or different blockchains are diversifying their treasuries with an asset that is a bit safer than any other digital native asset. So, for example, if they have, let’s say, $50 million in their Treasury, maybe they want to put $10, $20 million, instead of having it on as stablecoins in USDC, they can have it in these treasuries, and they’re earning these 5% onchain. And these are basically risk-free or as risk-free as it can be, because it’s just backed by the US dollar. Then, whether, in real terms, because of inflation, they are going to keep their value is another story.

[00:12:15] Ray Salmond: So are these opportunities that are available for retail investors, or is it primarily like, are RWAs primarily for money managers and institutional investors?

[00:12:26] Ramon Recureo: It goes back a bit to the naming, but there are many, many of these things are available to retail investors. For example, the protocol we integrated in Kinto last week, Mountain Protocol, is available to any investor in the world except US investors; funnily enough, but they can’t purchase treasuries through Mountain Protocol. Then things like Athena, for example. You can see it also as RWA, and it’s available to retail.

[00:12:48] Ray Salmond: Are there risks associated with RWAs because it does seem like DeFi to me. So if I’m investing in tokenized assets, is there like a risk of protocol exploits or phishing attacks or maybe some sort of insolvency risk? Counterparty risk? What are some of the pitfalls that people that are interested in investing in should be aware of?

[00:13:13] Ramon Recureo: RWA assets are really unique because they change. They change a lot. So it depends. There is a very long tail of asset types, asset classes, and depending on the jurisdiction. For example, for you buying even just mortgages is really different for you to buy a used treasury or a T-bill than buying a ten-year bond. And it’s really different to buying a ten-year bond than buying a collateralized mortgage. So, the risk are different. But the common pattern here is that you need to check who is issuing the asset, and what’s the risk that that asset is going to default or go down in value in the case of treasuries. That’s why there is a lot of demand, because people trust the US government and people trust that they are going to pay the yield. So that’s why they have a lot of demand in the case of equities. I will say also, it’s also in the least risky because at least there is a lot more volatility. But at least people believe that there is the the rule of law in the US, specifically at US companies. So the shares are going to be respected then, as you get, for example, to if you tokenize a building in, I don’t know, in a jurisdiction that is not doing so great in terms of crime, then you can expect that your tokenized or synthetic version of that mortgage is not going to be that valuable. And this is similar even in equities, there are a lot of equities that represents or even reads in the real estate. But then, in the end, because the asset itself collapses, then your paper shares don’t mean anything.

[00:14:43] Jonathan DeYoung: What about in terms of the risks with the issuers themselves? Like I imagine that since RWAs is such a hot topic right now like, what if I want to set up a project where I say I’m going to tokenize, I don’t know, real estate here in Brooklyn, and I make it look legit, and people buy-in, and I issue them a token, and I, you know, set up a fake dashboard that shows them their yields, and they want to cash out. And I have like a classic like a Ponzi scheme type thing. Does this risk also exist in this RWA space that people need to be careful with?

[00:15:20] Ramon Recureo: Yeah. I mean, they need to be really careful. As I said before, it all goes back to the asset, and it all goes back to what… The cool thing is like, depending on how it’s tokenized, depending, for example, treasuries, they require much stricter compliance requirements to be able to be bought. So, in order to issue these assets, you need to be able to KYC all your users. You need to be able to keep all this data procedures in place to be able to issue the tokens and then be able to guarantee withdrawals and redemptions. It goes back to the asset. But for example, I can tokenize my rug in my living room right now. That doesn’t mean it’s worth anything. So, it goes back to what are the assets that are in demand right now. So, and it’s going to be the same. It’s like you have bonds. You have equities. You have commodities like gold. Then you have real estate, and then you have lending, collateralized and uncollateralized lending. Then it’s really interesting once you combine these together with the world of digital assets and the world of DeFi, so you can create much more efficiency.

[00:16:24] Jonathan DeYoung: Yeah. I wonder if there’s going to be like an RWA celebrity bubble like there was with NFTs, where, I don’t know, Kim Kardashian is going to tokenize her nails or something like that, and it’s not going to bring any value, and it’s going to collapse on itself. What about risk for the users themselves? Like you mentioned earlier that with Kinto specifically, if you lose your private keys, you can still gain access to your assets because everyone’s KYC’d and you have that function built in. But what about if, I don’t know, I’m a degen and I buy a tokenized treasury, and I use it as collateral to do some sort of an activity where I lose everything, and they have to seize the tokenized asset, or I just fall for some simple scam on the internet, right, where I give away my wallet information to somebody and they come and steal my asset. Is that just lost forever? Or with this KYC, real-world built infrastructure that you’re focusing on, is there a process in place for user error? If I make some mistake and send my tokenized asset to a scammer?

[00:17:41] Ramon Recureo: Yeah, that’s a great question. And it goes back, uh, to one of our design principles. We’re trying to protect users even from themselves. So that’s why we have this smart contract wallet and something really exciting that we’re going to announce this summer. We’re going to add insurance for every wallet of every user automatically, similar to how, for example, in the US, you have a deposit in a bank account, you are covered up to 250,000. We’re going to give every user automatically cover against a smart contract hacks of the wallet up to $2,500, and then they can purchase more if they require more insurance. So we’re going to cover them from smart contract hacks, and we’re going to cover them from any phishing scams and links. But at the end, there is a limit because if you have your keys and you give your keys to someone else and then that person switches your asset, there is nothing nobody can do. And then also, we cannot protect you against if you choose to buy this asset, let’s call it Shitcoin. Then, if that coin goes down 99% in value, you know, you chose to buy it. So there is nothing we can do in that sense to protect you from the financial outcome.

[00:18:51] Jonathan DeYoung: Since these are real-world assets. Right? Let’s, I don’t know, give the example of your rug that you were joking about earlier, your Persian rug that you’ve tokenized and put on the blockchain that somebody finds valuable. And let’s say I buy this rug, I get hacked because I’m a dumb newbie, and somebody else ends up with the asset representing this rug. Does that grant them the actual right to the physical rug that’s in your home?

[00:19:23] Ramon Recureo: Yeah, that’s a really good question because it’s something that Kinto can help. For example, if, let’s say, BlackRock tokenize whatever asset they want to tokenize, and then they send it to these users and some of the users, you know, put several hundred millions in this asset and then whatever, they lost everything, or they get they manage to lose it somehow. Then, still through the issuer and Kinto, because we have KYC’d everyone, we can really quickly disable hackers and scammers, automatically freeze those assets, and then return them to the rightful owners. But in the… There are a lot of great cases here. Most cases are not black and white. And there are also some assets where it depends where the final source of truth of an asset. And for most real-world assets, it’s going to be on the real-world on an issuer like BlackRock. So then it’s going to be able to be overturned. But for digital assets or for assets that are combined with them, then you cannot expect to always get your assets back because imagine that you use one of your assets as collateral and then the other assets, and then something happens. And then, because of that, it goes down in value. So then you can get liquidated. So even if the part of the assets will be recovered, then because that asset was hacked, probably that triggered some liquidation. So, there is always going to be collateral damage when some of these situations happen.

[00:20:52] Jonathan DeYoung: Then I guess a similar question would be, let’s say that somebody tokenizes a real estate property or a house. I forget where I saw this recently. If you invest in this, you get like one square foot of the house, something like that, the equivalent of that. So if I buy my one square foot of a house that exists in the real world — I buy the tokenized asset, I should say — does that mean that I can show up at that house, at that real estate property and stand in that square foot, and nobody can tell me what to do, kick me out, as long as I’m in that one square foot? Or are these tokenized assets more so being used for the value that one square foot represents? Like how complicated would it be to try to implement something where you physically own one square foot of this real estate property, and you can do whatever you want with because you own the asset that represents it?

[00:21:55] Ramon Recureo: Those are two different questions, and it’s similar to right now, if you forget about the blockchain for a moment. And all that tokenize is similar to right now, if you buy a share of house with ten different people and then you say, okay, buying 10% of this allows me to book this weeks of the year for me to stay in the house. But it’s different than, for example, you investing in that property through a REIT, and then you just get financial upside. But that doesn’t entitle you to stay in the house or do anything with the house. And it’s similar when you tokenize it. Either you can define the assets and construct the assets to give you those rights, or it only gives you a financial rights whenever there is an exit.

[00:22:35] Jonathan DeYoung: Gotcha. Yeah, that makes complete sense to me.

[00:22:37] Ray Salmond: So when I spoke to Victor Sanchez from Kinto, he mentioned that RWAs should supercharge existing markets by unlocking stranded and fragmented liquidity within tangible assets and intangible assets. That kind of went over my head. What does he mean by this?

[00:22:58] Ramon Recureo: Yes, basically means that right now, for example, for there are so many different assets, but you can… For example, RWAs are also collectibles. For example, if you collect baseball cards, you can see those are RWAs. But right now, for example, if you want to sell your famous card from Michael Jordan and that is super valuable, it’s going to be really hard for you to find liquidity. It’s going to be really hard for you to find buyers. And then you need to trust them. You need to hire an escrow service or use some of these software-as-a-service platforms that take a hefty fee, 5% to 10%. So basically, blockchain’s allowed to turn everything into a market, into an efficient market. So it’s going to be able to condense liquidity quite a bit and turning all these marketplaces into a much more efficient place for both sellers and buyers. I don’t know if that makes sense.

[00:23:56] Ray Salmond: Yeah, that does make sense. But then it makes me wonder about something else. Because at least in DeFi and even in the real world, though, but especially in DeFi, there’s been multiple instances where allowing tokenized assets to be used as collateral leads to these events of insolvency or other types of dangerous rehypothecation, where leverage is multiplied, and sometimes assets are much less liquid and backed by nothing like the assets are less liquid than investors believe. So what are your thoughts about this, and what type of investor protection must Kinto abide by or have put in place already?

[00:24:37] Ramon Recureo: First, I gotta push back a little bit because I agree that’s the perception that many people have, but I don’t think that’s a fair perception because, for example, rehypothecation happens much more in traditional finance, and a lot of these assets are opaque, and they disable, or they stop the market whenever something like this happens. Or you can see what happened in 2008. But in DeFi, people confuse also FTX and all these things. None of that was DeFi. But, for example, you take Aave or Compound, the major lending protocols. Liquidations happen transparently and efficiently and orderly every single minute. You know, you can deposit your ETH, you can borrow your stablecoins. And then, if, for some reason, Ether comes down in value 30%, that happens automatically, and everyone is able to trust it. And you can access loans, and you can access borrowings in a matter of in a matter of seconds without having to ask permission to anyone. But it’s always true that the moment you add leverage, you are creating path dependency because if you are looking for this outcome, then you cannot stand volatility anymore. So the moment you leverage yourself, depending on the path that happens, you can blow up. But this is not this is not a problem of DeFi. It’s something I think is much more prone to happen in traditional markets than on DeFi. In DeFi, because we have this onchain, discoverable and real-time updates, these liquidations are a lot less harmful, as Compound has managed like billions of liquidations, especially in 2020 when the market was exploding and all really orderly.

No need for a government support or government rescue. All the only things that blew up were centralized things like Celsius, Voyager, FTX, Gemini, all the lenders, and all that leverage was happening offchain. Leverage offchain is really clear. You see what is your liquidation price. But then, of course, there is going to be a lot of a lot of potential for problems the lower the quality of the asset. If you use Bitcoin as collateral or you use something like treasuries as collateral, you are pretty safe because, obviously, with the treasuries, you have a lot less volatility. So, you know, more or less, how much you can borrow with Bitcoin. At least you are safe in the term that the asset that you are using, you know, it has value because now it has more than ten years, is now a part of the Bitcoin ETF, but it has more volatility. So, you need to adjust for that when you use it as collateral. But then, if you, if you use my rug as collateral, of course, or you use any of this meme tokens as collateral, that’s just asking for trouble.

[00:27:08] Ray Salmond: Mhm. I agree with you. You have a good point there. And your pushback that within DeFi, everything does happen. It’s automated, it’s onchain, it’s visible. And within stocks, when there’s issues, the circuit breakers get triggered, or people are instructed to freeze markets, which is kind of opaque. And markets pause like we saw with GameStop and Nvidia and some of those other stocks even even recently. So it seems like when it comes to crypto, the SEC is really reluctant and nervous about letting retail investors experiment with fintech, experiment with DeFi, experiment with collateralizing assets that they either think are unregulated securities or too volatile. And that’s had a negative impact on DeFi over the years. But just yesterday, news broke that the SEC basically kind of put down its war against trying to figure out if Ethereum is a security or a commodity, and a lot of people have resigned within the SEC’s crypto enforcement wing, and it seems like Gensler might be out the door. So with the US kind of looking like it’s maybe becoming more crypto-friendly, what sort of ramifications do you think that will have on projects like Kinto and DeFi and RWAs in general?

[00:28:26] Ramon Recureo: A lot. I mean, as someone that has built already two different protocols in the space, I can tell you this is really hard. It’s really difficult because you need to worry about a lot of things, and you also need to spend a lot of money just to be able to create something that can be valuable for people. And of course, with any new technology, there are a lot of bad actors that exploit the technology to be able. And it’s true that 95% of the tokens are scams, or even more, even is 99%. But it’s really funny because I think many of the regulations or guidance that have been put in place has made it really hard for legit projects to actually provide value to users, and they have made it really easy for scams to actually hurt users because, for example, it has been way easier to create a mint token that for a protocol like Aave that is generating billions of dollars in revenue to distribute that revenue back to tokenholders, which is totally makes no sense. And if you see also what has been the the recipients of this enforcement actions by the SEC, they have not gone after the any of the… And there are so many thousands of scams that are plain and visible every day. They have gone after people that have tried to do things right, like Coinbase, like Kraken. Then also Uniswap and many other protocols have been trying to do things right, but it has been really unfortunate. I mean, but in the end, it’s like every technological new paradigm is changed, and most people don’t like change, especially if there is a lot of industries and vested interests.

So it’s just normal. I see it similarly to how in the 2000s, the media companies really pushed back against, you know, all the YouTube, all the new online media. They wanted to control all the content, and they were also all the internets before that. But banking is, because it has a lot more power in a way, and it has been entrenched for many more years, it’s one of the last industries that have not been kinda altered in the last few decades through innovation. Another one can be healthcare because of the government involvement. But this cannot be stopped. This dam has been broken, and now people are understanding why BTC and ETH is needed. And it’s much more obvious in other parts of the world, like Argentina, or that I spent a bunch of time there that people don’t ask, oh, why crypto? Why should I use this? Is this useful or not? No, everyone uses it because until the new president came, they have like several hundred percent of inflation every year. So as soon as people got their paycheck, they just converted them to stablecoins. And it’s obvious why you need some kind of a store of value or a stablecoin that is not tied to your currency of the place you are living, to be protected against mismanagement by the politicians of your country. Hopefully, you’re happy. Hopefully, you don’t need it. But it should be obvious that this is a good thing. And money or value that is not tied to your jurisdiction. This is an obvious need for the world.

[00:31:29] Jonathan DeYoung: Very well said. To go back to the interview that Ray was referencing a minute ago that your co-founder, Victor Sanchez, participated in with Cointelegraph. Another thing he said was that RWAs are a multitrillion-dollar opportunity. So if, as we laid out in the intro right now, they’re in the multibillion dollars, but they are multitrillion-dollar opportunity, how far away do you think we are from getting to that trillion-plus dollar point? And what will it take for us to get there?

[00:32:02] Ramon Recureo: It’s a really good question. These things are not linear. So they are they are hard to extrapolate. It’s not like, oh, we have $500 billion now. It took us a year. So then, in ten years, we’ll get to $5 trillion. No, it doesn’t work like… Probably it’s going to go $500, $600, $650, $670. And then one time in a year, it will go from $650 to $3, $4 trillion. Because this is how these networks with the exponential adoption work. In the end, the asset market for this is everything. Because if you see what’s the total market cap of treasuries? It’s $50 trillion. What’s the total market cap of bonds? It’s like more. Derivatives? It’s quadrillions. Gold is $10 trillion. All these assets are going to be tokenized the same way as 20 years ago, everything was modified to switch to electronic shares from paper shares. Now, the next kinda just boring innovation is to just change the medium from electronic shares to tokenized shares. So all that value is going to move to the blockchain, but that doesn’t mean it’s going to change anything. But then the cool thing is like, because blockchain gives you a lot of things that the current technology doesn’t give you, like 24/7 instant settlement, compose things much easier. That’s gonna unlock a lot of and much lower cost as well. It’s going to allow for a lot more interesting use cases and composability between all these different assets that right now feel like they are all different islands, like all you have stocks, you have bonds, you have equities, you have mortgages, and then you have crypto. They’re all different islands connected by really flimsy bridges. In the end, it will all be like really connected by this like super, super high-speed train. You can easily go from one asset class to another.

[00:33:44] Jonathan DeYoung: So if it does get to this trillion dollar point, or you were talking about the growth of how it might one year hit this the next year, hit that. Do you think the RWA market is immune to the crypto market, or maybe more immune to the crypto market volatility and crypto market collapses like we’ve seen kind of over and over again throughout crypto history? Or is it possible for these real-world assets to also get caught up in the storm, so to speak, and that market to implode if Bitcoin price suddenly flash crashes to, I don’t know, $10,000, like we’ve seen stablecoins, for example, depeg from their peg. And not just talking about Terra Luna, I’m talking about, you know, USDC’s depegged. So is there a risk with RWAs in that regard, or are they a bit more insulated from the market crypto market specifically forces that might push the price of traditional cryptocurrencies down?

[00:34:54] Ramon Recureo: Yeah. Again, it goes back to that. It depends. It depends on the asset. But things like treasuries, if they are used by a respectable issuer, US Treasurys is not correlated with Bitcoin. So that asset will do really well in bear markets. For example, in bear markets, get into some combination of US Treasurys or stablecoins that give you that kind of deal makes perfect sense. But then, for example, you can buy RWA. Again, I hope we remove that term. But it’s like, imagine you buy oil or you buy gas. Then it depends what that commodity does. It may be even more volatile than it, or gas was really volatile the last two years. The same with oil, that it went even negative at some point because of the contango and even from treasuries or bonds. I can make a case that in the next few years, because of the fiscal situation in the US, the real value of bonds may not be that great, but also that may be good for equities, maybe bad for equities. And then Bitcoin volatility may decrease as it becomes more stable. So maybe there is a world that a few years from now, Bitcoin is more stable than some of these TradFi assets. But some of these assets can be super volatile. And, of course, some of the crypto things are going to be always hyper volatile. These meme stocks, memecoins and things like that, they’re going to be super volatile. But what you are pointing to is that the more asset classes we integrate into crypto, the easier is going to be to isolate yourself from market downturns of a specific asset class while staying inside the crypto ecosystem.

[00:36:26] Jonathan DeYoung: So I guess zooming out a little bit again, you kind of hinted at this earlier, but is there a theoretical limit to what could be tokenized as an asset and put on a blockchain?

[00:36:36] Ramon Recureo: No, there is the token construction is useful to see. Similar to the website, the token, the ERC-20 and ERC-721 NFT. Both the token and NFT gives you a lot of power to represent property, right? Digital property rights on the internet. And then, of course, this is just the representation on a digital ledger. And for digital assets, this is perfect because there is no real or offchain real-world like physical meatspace assets. So then you don’t need anything else. But then that digital line that says that you have two things or two units of this asset means that you have two cars, that you bought two cars. Then, you need to also trust the regulation. You need to trust the property rights of the jurisdiction. And then it gets messy. But more and more of these things are going to come onchain. But this is a more boring innovation. But you know, the deeds, all the things related to your mortgage, will also be put on Ethereum. I’m convinced in a few years, you will also be able to check all those things onchain. But then, of course, if someone breaks and takes your car, you still need to have someone on the meatspace that is going to make sure that if someone steals it, it’s going to go to them, get them the asset and bring it back to you because the blockchain cannot do that yet. Robots? Yes. With robots. And the blockchain can purchase those agents.

[00:38:04] Jonathan DeYoung: I’m gonna give it back to you. Ray, I know you’ve got a potentially deal with your contractors that are in your house, so is anything you want to ask to make sure you have the time for it?

[00:38:13] Ray Salmond: Sure, sure. So before we started recording, Ramon, you said you had a slight issue with the naming RWAs real-world assets, and then you mentioned that again in our actual recorded conversation. So, what’s wrong with the name RWAs or real-world assets? What’s your problem with the phrase

[00:38:34] Ramon Recureo: It’s a couple. One’s that it assumes that the digital assets are not real. It’s kind of a bit pejorative toward things like Bitcoin, Ether or staked ETH, is that they have proven now that they are a real asset class that is now worth trillions. And then the second one is that it encompasses everything. So then, it doesn’t mean anything. So I would prefer to just skip because it’s like you have this basket that contains everything in the world. So you can just skip that naming and go one level deeper and say, okay, this is a tokenized bond, tokenized commodity, tokenized mortgage. It doesn’t matter. But right now it’s useful because so far, until now, 99% of the assets on blockchains have been digital assets. But then, a few years from now, when it’s going to be everything, you’re not going to care about real WAs. Like, okay, it’s everything. So it’s like, yeah, but right now that it has been nothing, and it’s starting, I can see how people are calling, oh, everything that is not digital, we’re calling RWA, and that’s growing a lot. But in a few years, that’s not going to matter, it’s everything.

[00:39:36] Jonathan DeYoung: You mentioned a couple minutes ago the example of like buying a sports car or a car that’s, buying the tokenized version of a car versus buying the actual car itself. And you may have answered this indirectly early in our conversation, but what are some of the benefits of buying a tokenized version of a car or a trading card or something like that versus buying the actual trading card? The actual car. Because you can’t drive the car if you just buy the tokenized version of it unless you have a contract, as you were saying earlier, that grants you rights to use the car as long as you have the asset in your wallet or whatever the future may hold. But are the benefits really that you can take that tokenized version of the car and use it for digital leverage, which maybe you can’t do with the real physical car? Or maybe that you don’t have to, I don’t know, manage the security of the car because you have the digital version? Is there any other, any other benefits that there might be to holding a tokenized physical asset that one would normally purchase the physical version of?

[00:40:47] Ramon Recureo: Yeah. Let’s use the example of our house because I think it’s a bit clear here, assuming that, you know, the tokenized version of the house matches really well what happens on the real world and doesn’t forge the property, right? Everything that that connection is good. Being able to have this asset on a blockchain allows you to do basically a lot of financial innovation. You could create two different tokens. One of them could be that if you have this token, it allows you to stay in the house. Then you could have another one that, if you have this token, you have ownership of the house itself, and then you can resell it, and you get the financial upside, and then you can do another one, even, that is like yield splitting. That is like for example, I buy the house, but then I sell these tokens that gives you the right to get the rent every month from my tenants. So you can also create that financial innovation. And then also because it’s onchain and there are these even assets right now, there are, you can put your house as collateral, and you can borrow USDC from it if you need it. And this is all within minutes. You don’t have to go to these companies, to these banks, fill all these forms. It’s like, no, your asset is there, it’s trusted, it’s non-custodial. And then, if, for whatever reason, the value of the collateral goes down, then automatically, it will get seized and transferred abroad.

[00:41:59] Jonathan DeYoung: So I’m now imagining a hypothetical future, and you can tell me if I’m way off here, hypothetical future — and again, I don’t know if this is utopian or dystopian or what — but where the ultra-wealthy no longer buy paintings, they’re not buying, I don’t know, whatever the store of value assets that the wealthy buy now. Properties somewhere in New York. They’re just buying the tokenized versions. They’re living in a house somewhere, and they have like $1 billion worth of tokenized assets that are all somewhere out there, but that they never actually have to physically interact with, manage the security of, restore, whatever the issues that come along with. Let’s just stick with art. With buying art, they can just have the tokenized representation of that art, and that art is forever held in, I don’t know, some warehouse in international waters floating on a boat or something like that. Obviously, I’m being a little bit facetious and extreme here, but how far away do you think I am from the reality if, like, this RWA market really, really ramps up, and we’re talking multiple, multiple, hundreds of trillions of dollars worth of tokenized assets?

[00:43:18] Ramon Recureo: Yeah, I think you’re right. I mean, what you mentioned already happens in TradFi, for example, with gold. People don’t hold the gold. People just hold the paper shares. And then these companies just hold the gold in a vault. So, in the end, it’s the same. And all the assets you mentioned are also like art paintings or also wine.

So, it’s also that’s why I hate the name, but... And what you say is correct. It’s going to allow for a lot more financialization and markets, you know, buy sell, buy sell, buy sell. And it will also allow more scams because there are going to be probably much more paper or digital bottles of this wine that actually exist in reality. So you need to trust that whoever is the custodian is, because otherwise, you know, there’s going to be someone to say, okay, I’m going to sell you this wine from the 87. Only 100 bottles were created, but this guy is selling 70,000, and he only has like five in the vault. But it’s like there’s going to be probably some scams tied to that connection between the representation of your asset. And then that’s why it’s really important to go with issuers that you trust and that, you know, that is the same, that you know, right, that you do right now if you want to buy gold and someone is holding it for you because you’re not going to hold the heavy metal on your house.

[00:44:36] Jonathan DeYoung: So the next techno-thriller in 20 years is going to be thieves trying to break into your cold storage wallet that has your private keys to get the art, the RWA for the art. Yeah. Or, sorry, the asset representing the RWA, or I don’t know. As you’re saying, the terms are a bit confusing sometimes in terms of how to use them. All right, I got one last question, topic I want to run by you. A lot of what you’re saying with RWAs and the tokenization of these assets sounds very similar to the promise I’ve heard of NFTs, where people are going to be issuing NFTs to represent, I don’t know, whatever piece of art. That you buy the NFT and you get the digital art, but you also get the real art, the physical art. You buy the NFT and it represents a deed to a house. So, what exactly is the difference between tokenized real-world assets and NFTs? And is there crossover there?

[00:45:40] Ramon Recureo: Yeah, it’s exactly the same. There is no difference. Basically, tokenization, you can tokenize using NFTs. That is one standard for the tokens. Or you can use a different standard for things that are unique. NFTs make more sense if there is just this Picasso painting. Makes sense. That is one of one, this unique Picasso painting. So you can just use NFT. If you are creating this, I don’t know, this 5,000 diamonds, and they are all the same, you could create a token, ERC-20, and tokenize it that way, and they are all identical.

[00:46:12] Jonathan DeYoung: Okay, okay, okay. So, the NFT represents, the NFT is just a way to, it’s a medium through which you could tokenize a real-world asset. Okay. That makes complete sense to me. I see you just got back, Ray. Do you have any final questions? I think that was my last question.

[00:46:29] Ray Salmond: Yeah, I had a question about KYC. How does Kinto go about the KYC process? And when I had talked to Victor Sanchez about Kinto, he also mentioned that there are some sort of onboarding process where Kinto spins up data sets, which then go to the institutional investors, which creates like an easy layer for KYC. So if we can bring everything onchain and, I guess we’re also trying to lure like people that are crypto native and been in the game for a while to also use RWAs, but KYC is a component of it. I just wonder what that process is like. And I’ve got Bitcoin that I bought like in, like six, seven years ago that never transact anywhere. I don’t know where they come from. You know, there’s always this concern about money laundering and washing money and terrorist AML and all that. There’s always this concern with crypto. So how do you keep that out of RWA with or even without KYC?

[00:47:32] Ramon Recureo: Yeah, it’s a great question. First of all, we have put a lot of work to make sure we have created a chain that is still decentralized and still permissionless, still non-custodial, but has KYC. This creates cognitive dissonance because people cannot hold those two thoughts at the same time. And the way we have done it is that we have kept all users data always private, and crypto doesn’t store anything. You, as a user, when you create an account on Kinto, you can choose your KYC provider. And those are like Web2 companies that do this really well. Companies like Plaid, companies like Synaps, companies like Onfido, and they will store your PII. Then, what it does is it creates cryptographic proofs that match that to your address. But nobody can link, for example, that if you KYC through Plaid, Plaid doesn’t have your wallet identity. So they cannot create any connection. So even if they got hacked, they cannot know what your wallet address is. And then, uh, even in our network, users and our governance members will decide which KYC providers are available. But then, in the case of an emergency, then governance can rebuild the link between an address and a specific record on a KYC provider.

And we can hand it to the authorities. So that’s how we have done KYC. And I’ve been in crypto for seven, eight years. And the moment I hear KYC, I understand I get an immune allergic reaction. But we unfortunately need to do this right now because it’s what the regulations and what the financial institutions require. I believe KYC is an outdated technology, and we don’t need it, really, because we have zero-knowledge proofs. So there is no reason for me that I should upload my ID and tell them when I could create a zero-knowledge proof proving that I’m a resident of California and I’m above 18 years old, etc., etc. But regulations, governments move really slow. So until they accept this, if we don’t want to wait ten years to be able to onboard these financial institutions from Wall Street, from Zurich, etc. etc., we need to provide them a way in right now, and that’s what we are doing. We are creating this middleware that is as crypto-native as possible, is decentralized, is permissionless, is still connected to Ethereum, but it gives all these institutions the tools so they can meet their compliance check and make their compliance guys happy.

[00:49:47] Ray Salmond: Right, right, right. That makes sense. So, Ramon, you mentioned governance and governance having an impact on choosing what sort of KYC providers Kinto users might select. Right. And in crypto, governance usually means token and governance and token usually means airdrop. So you don’t have to like say that Kinto’s doing an airdrop or will have a token, that’s not really relevant to us. And maybe that’s something that you’re not at liberty to talk about. But I would like to know why do all these platforms need tokens? I understand governance, like I get it, I understand the concept of governance, the ideology of decentralization and how that also keeps the SEC off projects’ backs. Right. But why do projects like EigenLayer and all these other Ethereum L2s and whatnot, like why do they need a token beyond just having governance and incentivizing liquidity? Which is always kind of fleeting anyway, because it seems like after these tokens happen, users leave, and they cash out the token, and the price goes to like zero, and the whole thing seemed kind of pointless. So what’s your view on that?

[00:51:05] Ramon Recureo: For the record, for us, I mean, our launch program is open. It is finished actually three weeks ago, and we launched two weeks ago. So then, users are going to be able to receive their crypto tokens already. There are many different reasons. If you think from first principles. In the end, 500 years ago, the Dutch East India Company was created and in the end it was created. And this is basically the company, the original company. And with the company, you could emit shares to all your employees or to hundreds of people to make sure you can coordinate these people through a common goal. Before that, you could only coordinate ten people, 510 people, your family, your tribe, etc. Then blockchain allows you to increase by two orders of magnitude. This, and right now, companies like Facebook, Apple issue a lot of stocks to employees, to investors, etc., but as soon as the company goes through a few rounds or it goes public, then the principal-agent problem is really obvious because people are not incentivized, and it’s really egregious also that the users, the initial users of Facebook, of Harvard and all these universities, they created a lot of value for Facebook, but they didn’t capture any of the value. So, in the end, what you can do… And a token is used for 2 or 3 different reasons.

One of them is to give governance rights to holders. That is the one we mentioned. So then you make sure the network or the protocol is owned by the holders that are the ones that have a vested interest. The second one is to share back all the value created by the company, for example, using maker that is making billions of dollars in revenue. Maker holders are recipients that yield back, and the same is going to happen as soon as regulation. But for example, SushiSwap also did that back in the day. The only reason why some protocols right now, they are not sending it back to tokenholders is because of the regulations we were talking before. But this is a much clearer path for users that have used an applications or that are part of a network to capture financial upside by using a network and capture it much earlier. Because right now, companies stay private for ten years, and then users cannot buy any shares of these companies until the IPO, which is probably never. Then the final reason why many protocols of chains need a token is because, without the token, it will not work.

Because you need the token to turn this into a market. The obvious example is Ethereum. You need ETH, the token, to be able to pay for block space, and then gas is basically what gets spent. That is a small fraction of Ethereum every time you want to put that transaction onchain. So, the token should represent, in one way, the scarcity resource of the network. In the case of Kinto, for example, as an L2 and many other tools do the same, they have a sequencer. So, the L2 captures fees from all the transactions that are sent on the network. Then these things are sent to a treasury that then eventually, you can see how in the future one of these layer 2s could say, okay, now all this Treasury is going to flow back to all the tokenholders of the network. And then this decision will be up to governance holders. And that’s why these tokens have value. It’s also similar but better than stock buybacks. So you can see it also how it has a direct impact on the value or dividends. You can also see it as dividends. You can easily have dividends easily, have buybacks easily, have any kind of mechanism you want there.

[00:54:28] Ray Salmond: Yeah, right. Thanks for explaining that. So I had kind of given up on the dream of all the profit sharing and tokens being given out to stakeholders, you know, like supply side fee, revenue share, and all that since the SEC had been so against that. But as things kind of turn more crypto-friendly in the US, maybe we’ll see some of those original intentions become kind of more routine within the space. And if the investors do well, the companies do well also, and vice versa. So, thank you for explaining that.

[00:55:05] Ramon Recureo: I think we as companies, in the first few years, they just reinvest all their, all their earnings. But it’s kind of like if you can see it as the same the crypto companies some because of regulation, they have been reinvesting all these earnings and they have been keeping them in the treasury. But at the moment, they can enable these fees, which then all this value that is in the treasury can be kept prisoner there will be able to flow through tokenholders.

[00:55:30] Ray Salmond: Brilliant.

[00:55:31] Jonathan DeYoung: We’re all going to make it. We just hold out.

[00:55:33] Ramon Recureo: Yeah.

[00:55:34] Ray Salmond: Basically. Yeah.

[00:55:36] Jonathan DeYoung: I was just going to say, I came into this conversation, like I said at the beginning, knowing literally nothing about RWAs. And I’m sure some of my questions reflected that ignorance. And I have left this conversation knowing quite a bit more. And so I’m very thankful for you taking the time, Ramon, to be with us here today and really, as I said, educate me on, and I’m sure others as well, on what RWAs are, why they’re important, why they seem like they’re going to be the future, and I guess why they’re already the present. So thank you. And then is there, one last final question would be how can people follow you? How can people follow Kinto if they want to get involved? Is there a website? You mentioned that the token launch is already over with, but is there any other ways that people can get involved?

[00:56:32] Ramon Recureo: Yeah. Thanks a lot, and thank you for all your questions. I think they are representative that most people also would have many similar questions as well because it’s really confusing. So I think this would help a lot of people that have the same questions. Yeah. You can find us in our website at kinto.xyz. Twitter at @KintoXYZ. And then we also have Medium and Discord that you can join from our Twitter profile. Then we just started our mining program and that is going to be running during onchain summer. We have this campaign where we’re going to be giving 2% of the whole token supply to investors and new users that participate and deposit capital in these RWA assets during the summer. So, if you want to participate and be part of the mining program, you can just head to our website and create an account.

[00:57:22] Jonathan DeYoung: And for the US, though, that would be limited to institutional investors, I assume, at this point?

[00:57:28] Ramon Recureo: No, it’s allowed. It’s allowed to everyone. The only thing they may be some assets that you cannot use as a US investor. But right now, we have like seven assets. US investors can access six of them.

[00:57:39] Jonathan DeYoung: Perfect.

[00:57:40] Ray Salmond: Yeah, that’s actually really good. Well, Ramon, thank you for coming on. Today was a great conversation. I also learned a lot about RWAs. You took what seems like it should be something that’s really simple and easy to understand, but it’s actually confusing. So, you simplified it for me and for the listeners. And we appreciate you sharing some of your time with us today.

[00:58:01] Ramon Recureo: Thank you. I really appreciated it. Thank you.

[00:58:08] Ray Salmond: The Agenda is hosted and produced by me, Ray Salmond.

[00:58:12] Jonathan DeYoung: And by me, Jonathan DeYoung. You can listen and subscribe to The Agenda at cointelegraph/podcasts.com or on Spotify, Apple Podcasts and wherever else podcasts are found.

[00:58:25] Ray Salmond: If you enjoyed what you heard, rate us and leave a review. You can find me on Twitter at @HorusHughes, H O R U S H U G H E S.

[00:58:34] Jonathan DeYoung: And I’m on Twitter, Instagram, and just about everywhere else at @maddopemadic. That’s M-A-D-D-O-P-E-M-A-D-I-C.

[00:58:45] Ray Salmond: Be sure to follow Cointelegraph on Twitter and Instagram at @Cointelegraph.

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