Finance's Foundational Problem Just Got Solved

I just got back from Nashville for our Portfolio Accelerator conference, and every conversation I had kept circling the same topic.

There's an asset class being built right now that BlackRock, Goldman, and JPMorgan are all racing to get into because it’s finally addressing the fundamental issue of trust in our financial system.

At the centre of this trust problem lies a single network that has created a new proprietary technology that has the potential to see trillions of inflows beginning in just a month’s time.

To best explain, I'm going to demonstrate the difference of high vs low trust systems, and how we create layers of expensive systems just to mitigate against trust problems in society.

I just landed back from Nashville. And every time I fly into the US, the same thing happens.

I line up, get fingerprinted, photographed, and a  guy with a rifle watches me walk to the booth. I get questioned about why I'm here. And I'm a 20-something year old from New Zealand which a Five Eyes ally, a country with no army. Literally one of America's closest friends. But I’m still treated like a suspect.

When I fly home to NZ I just scan my passport and a gate opens. There’s no humans or lines. On a domestic regional flight, I don't even go through security; technically I could have anything in my carry-on.

It’s the same person but a completely different experience.

The reason is simple. Because New Zealand is a high-trust country. Everyone's practically neighbors. But trust like that doesn't scale. The US isn't low-trust because of culture, it's low-trust because 350 million people across 50 states simply can't rely on social familiarity. So they build systems to compensate like the TSA which spends $12 billion dollars a year to manufacture the trust that a handshake used to provide.

But even with all that friction, I can still get to Nashville faster than a wire transfer.

That’s exactly why tokenization matters.

The financial system spends hundreds of billions of dollars a year on the equivalent of TSA through back offices, reconciliation teams, compliance layers, intermediaries all because institutions don't trust each other's books. It's the TSA of capital markets. And we’re all paying for it.

Here's the thing nobody talks about when they discuss tokenization.

Trust.

Think about why TSA exists. It's not because every passenger is dangerous. It's because you can't tell which ones are. So you screen, fingerprint, and question everyone.

Now apply that same logic to financial markets. When Goldman Sachs and JPMorgan trade with each other, they don't trust each other's books.

They're separate institutions with separate systems and separate incentives. So what do they do? They both keep their own record of the trade. They both have back-office teams that make sure their version of events against the other side's version.

They both hold capital in reserve against the risk that the other side doesn't deliver. That entire apparatus of checking, verifying, and holding capital "just in case" is the financial system's version of TSA. And it costs hundreds of billions of dollars a year globally because no one can afford to assume the other side is doing everything right.

That's the tax. That's what tokenization is ultimately trying to remove. Not by making people more trustworthy but by making trust less necessary. By building systems where you don't need to trust the other side's books because you're both looking at the same book.

Here's why every previous attempt to get there failed.

The people building this technology were not trusted; the humans behind these projects were anonymous. cartoon profile pictures on Twitter. You're asking a bank that's survived for 200 years to trust infrastructure built by someone who won't show their face, lol.

And then FTX happened. The people running the system were criminals and billions vanished. Every institution that had been cautiously considering crypto watched that happen and said: "This is exactly why we stayed away."

So where are we now?

For the first time, the builders have changed. The people behind tokenization today aren't anonymous Twitter accounts. They're regulated institutions, public companies, teams with decades of financial services experience. The kind of counterparties a compliance team can actually underwrite. BlackRock isn't putting its name on something built by a pseudonym. Neither is Goldman. Neither is any institution that's now entering this space.

That's the trust shift.

But trust was only one of four problems tokenization needed to solve. The other three (regulation, infrastructure, and composability) each killed previous cycles in their own way. And I'm going to break each one down this week, because once you see all four coming together at the same time, you'll understand why this cycle is fundamentally different from everything that came before it.

That's why this Thursday at 5pm ET I'll walk through all four: why previous cycles failed, what's changed, and why this is the first time institutions can actually move.

At the end of all that comes a set of opportunities that I think have the potential to 3x, 5x, and even 10x over the coming years, because now these four ingredients are coming together.

The most important of which is a single network that all these institutions are plugging in to right now, and beginning in just over a month's time the SEC eases up on their rules that will see trillions of dollars of inflows into this network and others like it.

If you want the full details of this mega trend playing out right now behind the scenes, I'll break it all down on Thursday's event.

Cheers,

Louis Sykes
Senior Crypto Analyst, All Star Charts