Blockchain will be disruptive to all financial services – WisdomTree’s Jason Guthrie

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(Kitco News) – In the world of digital assets, institutional adoption and integration with the traditional financial markets is a hot topic of conversation as the nascent asset class slowly gains adoption amid a concerted push by governments to regulate the industry.

At the recent Consensys conference held in late April, Kitco Crypto had a conversation with Jason Guthrie, Head of Digital Asset Products at WisdomTree, to gain more insight into how regulated firms are approaching offering digital assets.

WisdomTree is a traditional asset management firm that has been in exchange-traded funds (ETFs) for about 15 years, Guthrie said. The company manages approximately $92 billion worth of assets in traditional finance and has recently begun moving into the digital asset arena.

“We created a new division within a company focused on digital assets about two years ago,” Guthrie said. “We did a series of research projects and test cases with the idea of ​​investigating whether this technology is going to be disruptive to our business model and came to the conclusion that it’s not just going to be disruptive to business models, it’s going to be disruptive to all financial services.”

Since the initial investigations, WisdomTree has launched five crypto-based exchange-traded products (ETPs) in Europe “where the regulatory environment allows them to be approved and listed.” The total assets under management across the listed products is $250 million, he said.

The firm has also applied to launch a Bitcoin ETF in the US, but so far the Securities and Exchange Commission (SEC) has yet to approve any spot Bitcoin ETFs.

Along with an investment in Securrency, a tokenization and financial logistics provider, WisdomTree has also built out its own tokenization offering where “we aim to bring traditional exposures into a native blockchain world,” Guthrie said.

There are currently pilots running with dollars, gold, wrapped Bitcoin and Ether. WisdomTree also has nine SEC-approved funds – with more in the pipeline – that offer traditional exposures to things like short-term fixed income, short-term interest, longer-duration bond funds and equity funds in a blockchain-native way.

Guthrie said there are three categories of products: One that is direct-to-consumer, one that focuses on the digital asset ecosystem for distribution, and a third that is for institutional financial logistics.

WsidomTree is focused on direct-to-consumer products, he said. “We’re building out a mobile-first financial services application offering that allows people to be able to hold, send and use tokenized exposures and be connected to everyday financial services. So give people a bank account number so they can get their salary deposited and debit card so that they can buy things. Then everything else is put on public blockchain infrastructure.”

The new service is currently in beta and is expected to go live in the app store at the end of the quarter, barring unforeseen roadblocks, Guthrie said.

Regarding the introduction of the ETPs currently available in the European market, Guthrie said that the primary user base is institutional customers and that these types of products still make up a “relatively small part of people’s portfolio and the education adoption process is a process.”

He went on to note that interest in these products is largely driven by market sentiment. Product development begins to slow at the end of bull markets as interest falls, and when things start to pick up again, conversations and interest “come back to life. That’s the way investors work.”

How blockchain will disrupt financial services

When asked what WisdomTree found in its research that indicated blockchain and crypto were going to disrupt all financial services, Guthrie highlighted the power of tokenization and “the power to make exposures available in an infrastructure that is ubiquitous and can achieve massive scale.”

This is a similar process that happened with ETFs and the mutual fund industry, he explained. “The big prop of value was that when you made it available on an exchange in the equity ecosystem, it was suddenly available to any investor who had a brokerage account. And not only would they have access to your product, they would have access to everyone’s product and every product that would ever exist after that.”

This was a game-changer in the industry, and blockchain has the power to have a similar effect going forward, he said. “When you do something in tokenization, it’s the internet. It’s a market of billions and billions of people. So where we can see the potential for orders of magnitude, more scale, more access and more competitive business models, blockchain technology enables that.”

WisdomTree was part of a disruptive financial services industry, he said, and the firm sees blockchain as equally impactful and “doesn’t want to be disrupted. We’d rather be the guys doing it. We see the benefit is there. It will lead to a better investment experience, a better saving experience, a better banking experience for people every day.

Institutional interest

On the topic of institutional interest, Guthrie said there are two main points of interest: crypto as an asset class and blockchain as a financial services technology.

“Institutions investing in crypto is certainly a thing,” he said. “It grows. I think it will continue to grow. It is still niche. I will still represent 1% of the idiosyncratic market at the edge of their asset allocation, but it will continue to grow.”

As for blockchain as a technology for financial services, this is “of interest to pretty much everyone.” Guthrie pointed to private tokenization efforts by Goldman Sachs and JP Morgan’s internal chain as good examples.

“We recently announced that we’re involved in an institutional test network with Avalanche along with T. Rowe Price, Wellington and a bunch of other big financial institutions that are looking at how we can make our processes, our kind of inter-group interactions more efficient,” he said. “And we see this technology driving that. We really want to start taking use cases, business models and putting them in the chain to do things like reduce the amount of money that’s lost in things like settlement fees, timing and reconciliations.”

Using ETFs as an example, Guthrie listed the various parties involved in a purchase, including the broker, a market maker, a clearing member, an exchange, a clearing house and counterparties on the other side, including the asset manager and index provider.

“Everybody gets paid in this system,” he said. “Now you may not see it directly, but no one came to work for free, and you are the only one who eats something. It is at the price of the trade that you have, and that will come out of your return at the end of the day.”

Blockchain has the ability to reduce the number of parties involved, he said. “These efficiencies will feed back into the returns in the portfolios, the investments, the cost of spending, the cost of consumption to the end user.”

A specific use case mentioned by Guthrie was the integration of non-fungible tokens (NFTs) into the Know-Your-Customer (KYC) process. “We have a process in place where you can go through a KYC process, and once that’s verified, we issue an NFT, a soul-bound NFT to your wallet. That signals that this wallet is approved, and it will then be able to receive and transfer tokenized securities that we have created.”

In the future, it is possible that other licensed financial institutions will also recognize the validity of this NFT, meaning that the holder will not need to go through additional KYC checks to register for other platforms.

These soul-bound NFTs can also prevent the transfer of a registered financial product to wallets that do not contain one of these KYC NFTs, addressing a major area of ​​concern for a global financial market. These tokens can also be withdrawn by the issuer if the holder is ever known to be a bad actor.

“Any other financial services provider, be it JP Morgan, Coinbase, Wellington, or whoever wants to recognize it, can join the system. Then you don’t have to onboard with them because you’re already onboard with us,” Guthrie said. “You get NFT, you get access to all these services. It makes things much easier. You only need to do it once. It’s really great for democratizing financial services.”

Going forward, WisdomTree plans to continue expanding its list of tokenized offerings beyond the 11 currently offered, which “cover the spectrum of asset classes including precious metals, bonds, stocks and currencies.” Guthrie said there are several things in the works with the SEC currently and to keep an eye out for some announcements in the coming months.

Artificial intelligence

Speaking briefly on the subject of artificial intelligence, Guthrie noted that systems like ChatGPT have so far served as “really good productivity tools” and have the ability to help modernize the financial system by revamping the old, outdated technology stacks that many firms operate with .

“I think a lot of the reason why the legacy financial services players are so slow, or just behind the times when it comes to technology, is that they have a huge, complicated system that has been built up essentially over the last 50 years, exactly like adding incrementally on top of that,” he said. “This is a moment where we have this new technology where we can just flatten the technology stack. Start from scratch with blockchain and build on top of it. And that means that as technologies that [ChatGPT] exists, I think we’re going to be in a position to more nimbly integrate things as they emerge.”

MiCA and regulation

Wrapping up the conversation on the topic of regulation and the recent review of Markets in Crypto-Assets (MiCA) regulation in Europe, Guthrie said that overall, “regulatory clarity is a good thing.”

“I think the idea that jurisdictions want to bring crypto under the regulatory umbrella as opposed to trying to ban it, which everybody was really worried about 24 months ago, is a good thing.”

Guthrie expressed some concerns that the rules outlined in MiCA may be “a little far-reaching a little too soon” and could stifle innovation and development, but sees the bill as a good starting point for regulating the nascent asset class’s move forward.