How Digital Assets are Unlocking Real World Economic Activity

Announcer:
Welcome to Viewpoint, a TD Securities podcast. Listen in as we draw perspectives from a variety of though leaders on key themes influencing markets, industries, and the global economy today. We hope you enjoyed this episode.
Jeff Solomon:
Hello, and welcome to Viewpoint, a TD Securities podcast. My name is Jeff Solomon, and I will be the host for today's episode in which we would be doing the Digital Assets Magical Mystery Tour.
So I brought with me two really good friends who are on this journey with us, Elizabeth St-Onge and Davies Beller. And they'll be joining me in just a few seconds.
Before we get started, maybe I should just give you a little bit of an overview of what the Digital Asset Strategy Team does here at TD. First of all, we should say kudos to our senior leadership team to recognize that digital assets are something that we need to be developing strategies around. So the fact of the matter is there's a lot happening in the space, not just around cryptocurrencies, which is the thing that probably everybody knows, but there's really a payments revolution happening as things like stablecoins and tokenized deposits become real ways for people to be able to move money. It's early days, but we here at TD are spending a lot of time understanding what that means for us, for our businesses, how we can be leading the revolution internally as we move from, I would say, traditional payment mechanisms to incorporate new and different ways to move money globally.
So with that, I think it would be really interesting to bring Elizabeth and Davies into the conversation. And maybe what I'll ask you guys to do is first just introduce yourselves to everybody here and tell us a little bit about your history, like why you're doing this and what you're doing now at TD.
Elizabeth St-Onge:
Hi everyone. Elizabeth St-Onge. I lead the digital assets strategy and product at TD Securities. I'm a long-term payments, and cash management, and transaction banking person, has spent my whole career in this space working with corporate clients and FI clients, enabling payments, cash management, liquidity, trade finance. And this has been a really exciting time for me to see all of the opportunities that we have to solve problems that we've never been able to solve and address friction points that exist in this space. So I'm looking forward to our conversation today, and talking about, all the things we're doing and what we're seeing our clients doing.
Jeff Solomon:
Great. Davies?
Davies Beller:
Thanks, Jeff. Thanks for having me here today. I'm delighted to join you for today's TD Securities Viewpoint podcast. My name is Davies Beller. I'm a managing director in TD Securities Investment Banking Group, and I've been leading our firm's efforts in the digital asset ecosystem for the past six years.
Jeff Solomon:
So let's start with a basic 101. Let's talk about digital assets 101. And maybe this is a good place for everyone to start because we assume in the Digital Asset Strategy Team that everybody has some knowledge, but not everybody has the same knowledge. And so let's just try to level set with our listeners so that they can understand exactly what we're talking about.
So when we say digital assets, and Davis, maybe I'll give this question to you. When we say digital assets, can you just describe to people what does it mean to be digital assets and what are the subcategories of digital assets, just so we can orient ourselves in the conversation?
Davies Beller:
I think we use the term digital assets as shorthand to describe a number of things. And there's a great deal of confusion out in the general population. Some people think of crypto, cryptocurrency tokens. Other people are thinking about tokenized forms of assets, investible products.
But when we talk about digital assets, and particularly as it relates to the Digital Asset Strategy Team initiative at TD, we're really talking fundamentally about application of distributed ledger technology, blockchain technology, including asset and liability tokenization, digitized or tokenized forms of investible assets.
We've reviewed the different opportunities to apply this technology across all of TD's operations in every one of our businesses, from insurance to wealth management, from consumer banking, to corporate and commercial banking, and to our investment banking advisory and global transaction or money movement business. And the applications, as Elizabeth had said earlier, are tremendous for cost savings opportunities, to drive efficiencies, and actually to create new experiences for our customers and clients.
Jeff Solomon:
Let's drill down, Elizabeth, just a little bit, because I think it's helpful to frame the conversation in terms of there's cryptocurrencies, there's tokenized real world assets, and then there's tokenized money, if you will. And I think it's really important to maybe break down those three asset categories, just so people have an understanding. So when we talk about cryptocurrencies, I think everyone probably understands that that could be Bitcoin or Ethereum. These are layer one basic blockchains where there's value that might be traded.
I want you to drill it, if you can, on sort of tokenized money, what does that mean? And then tokenized real world assets and what does that mean?
Elizabeth St-Onge:
Sure, absolutely. And I'll answer that question by bringing it to life with some use cases or examples of where we're seeing demand.
So when we talk about tokenized money, it's predominantly stablecoins and tokenized deposits. And in particular around stablecoins, when we look at the use cases, up until now, when these were first released, a lot of the usage was still in the crypto world. So around on and off ramps for crypto trading, prediction markets, gambling, that sort of thing. And so it was easy for a lot of people to dismiss it as saying it's very fringe or very specific use cases. But when we drill down a little more into where the growth is happening, so we look at stablecoins and tokenized deposits, we are very much seeing the adoption and the growth from clients being real world economic activity. So for the purchases of goods and services.
So let me give a few examples of the key areas that we're seeing client demand. One is in the P2P, so person to person space. And where there's a lot of demand there is cross-border remittances. So especially people sending funds to emerging markets or markets with less developed banking systems, it can be very expensive, time-consuming, difficult to send the funds. And so digitized forms of money make that cheaper, better, faster. You can send it 24/7. It's very easy. The receiver, all they need is to have a wallet and they can receive the funds. So that is one space that's growing.
But actually the fastest growing space around digital money is in the corporate and commercial space. So corporates and commercials are looking at this. As I mentioned in my introduction, there's still a lot of friction point. These companies, a lot of them are cross border. They operate in many different countries. Managing their liquidity, their payments, their activities can be complex.
So a few examples of where they're applying this. Companies that are marketplaces, or that are in the gig economy, or the creator economy is one where we're seeing demand for tokenized forms of money. So for instance, a lot of the workers in this space, they want to get paid anytime 24/7. They could be in multiple countries. So companies in this space want to be able to pay in tokenized forms of money.
Another big one is in the B2B space. And this one is a little surprising. You think of your typical manufacturing company. They don't really need faster payments. They don't need 24/7 payments. They have payment terms. They pay 30, 45, 60 days out. But where tokenized forms of money are very valuable to them is that it becomes smart money. It is programmable money. When these firms talk about payments, they don't just mean the movement of funds. They mean the end to end payables and receivables processes, which are very error-prone and very intensive. They have large back office teams. And the programmability of money becomes a way for them to be much more effective, much more efficient. They can tie in their physical supply chain into their financial supply chain.
And then finally, the last example that I'll bring up is, again, in the corporate and commercial space, companies that have a lot of subsidiaries or presence across multiple geographies. This is a way for them to manage their liquidity and their cash pooling within their own firm. So the ability to move funds around across multiple geographies, across multiple legal entities, to pool the funds, to better manage their liquidity, especially if they're across a lot of different currencies and geographies, becomes a massive benefit to them. And the value of better liquidity management for these larger organizations is pretty significant.
Jeff Solomon:
Let's drill down on that just for two seconds, Davies, before we get to you. Because I think it's really important to understand that we're focusing primarily here, the discussion has moved to what we call tokenized money, which is basically like fiat currency, but it sits on a distributed ledger technology and it's much more easy to move. And I think there's two different categories there that I want people to be able to understand, because people use these terms interchangeably and they're really quite different.
So the way to think about sort of tokenized deposits on the one hand and stablecoins on the other hand would be money at rest. So like a tokenized deposit looks, and walks and talks like a regular deposit, except it actually sits on a distributed ledger, and enables programmable smart movements and easy transfer, much easier than the transfer mechanisms today for deposits that don't sit on chain.
And then stablecoins might be, and the way it seems is if it's materializing is that stablecoins are money in motion or money in transit. So this is when you're moving from one institution to another or from one person to another, there has to be a mechanism that actually reconciles the movement of money from one ledger to another, or the movement of money from one person to another on the same ledger.
Is that a fair way for people to be thinking about like the differences between say tokenized deposits on the one hand and stablecoins on another?
Davies Beller:
I think that's a great characterization and delineation between tokenized deposits and stablecoins. And blockchain technology is the foundational infrastructure that underpins both of them.
Jeff Solomon:
I'll ask both of you this question, but I've been hearing a lot from contrarians that stablecoins are, or in particular, or digital assets maybe even more broadly are like solutions in search of a problem. And it sounds like, Elizabeth, from the pain points that you've identified that our clients have, that's actually, there's plenty to solve there.
But Davies, maybe you can drill down on this a little bit because you've spent a lot of time in the industry and you've watched it evolve over the course of the past decade. Are digital assets or stablecoins in particular in search of a problem or is there real opportunities for people to scale in the space?
Davies Beller:
I think it's fair to say that we have not yet, the industry that is, have not yet discovered the entirety of the use cases where there's value to be derived from deploying stablecoins as a form of money in motion, I think was the characterization that you made earlier. And I would say that's true for tokenized deposits or the programmability of value or money in general.
Elizabeth gave a number of really good examples, but I think there are also a number of equal analogous examples on the consumer banking side. As we think about consumers who are late on payments or overdrawn on their payments, they can program their checking accounts and their debit accounts so that they're never late for payments. They're always paying just in time. And they're able to program their savings so that they're optimizing for the highest yielding investment product at any given point in time.
Elizabeth St-Onge:
Jeff, I'd love to answer that one as well, because I hear it by the way all the time. I'm in the industry speaking with other banks, with clients, with a number of different players in the ecosystem, and I hear that a lot. And I actually, I'm of two minds on it.
On the one hand, as we've been talking about, look, there are plenty of problems in this space. So in my whole career in the cash management liquidity payment space, we are not short of problems. We don't have to look for the problems. There's a lot that still needs to be solved. So often when I hear that comment, I'm like, "Well, actually I disagree because I think there's a lot to be solved."
However, I also, in defense of some of that comment, I think that often as an industry, and there's just all of this, digital assets and the technologies around it, there's so much hype around it and so much excitement, we are at risk sometimes of being just enamored with the solution, technology for the sake of technology. And sometimes we can lose sight of, well, what are we actually solving for? So I think sometimes we just have to be careful, when in the excitement of this, and the hype, and all of the noise, to see through all of that and really remind ourselves fundamentally, what are we solving for?
And maybe because I've been a product person my whole life, whenever I approach these issues, I always think about it in three ways. The first question I always ask myself is, "What is the problem we are solving for?" And if I can't answer that question, then we shouldn't do it. If you don't know what you're solving for, then there's no problem to solve. The second one is, is this a problem worth solving? Does it need to be solved? What's the value added here? And when I say does it need to be solved, for the end client, from the client's perspective, looking at from the client in. And then the third one is, do we have a right to be the ones to solve this? Why should we as an institution be the ones that solve that problem for the client?
And I think as long as we ground ourselves in those three things, what is the problem, the client problem we're solving for? Is it a problem worth solving from the client's perspective? And are we the right ones to solve it? And if we can articulate those, then I do believe this is not a solution search of a problem. As I said, there are many problems to solve, but we just need to be clear on what are we solving for.
Davies Beller:
There may be rain clouds gathering on the horizon. Whose problem are we solving for? Does it create new problems from someone else? If we can provide programmability of money, what does that do to the bank business model of attracting near zero cost deposits, which are then used to fund the loan book of the respective banking industry?
And one of the drivers, this is a use case, this is not a solution in search of a problem. One of the problems perhaps from the asset or cash holder's perspective is not generating a sufficient yield on their cash available deposit. That may be creating a problem for the banks like TD, like others. This is part of what we've got to solve for.
One of Elizabeth's key questions is, do we have a right to solve the problem? That question is being asked not only by large globally systemically important banks such as TD, but by new innovators, by new fintech providers that are using this technology, and we need to be mindful that we don't get to decide on behalf of the entire industry how this technology gets embedded into the financial system.
Jeff Solomon:
We use these analogs all the time, like where have we seen disruptive technology in other industries and how can we apply that to what we're seeing today? And I've said over and over again, because this technology exists in nature today, it hasn't been utilized inside the regulated bank environment. But other people are using the technology. It's not like it's not usable. It is usable.
And the big change that's happening now is that we had regulation, and particularly the Genius Act here in the United States, but also MiCA in the EU. And now in Canada, we've got the Stablecoin Act where the globally systemic important banks and other financial institutions that are highly regulated, historically we're told don't touch these assets because there's a lot of stuff in there that is maybe not good that's happening that we don't want you to be doing. Now we're being told quite the opposite, you must touch this because regulators will want to see it, and the legislators are going to want to make sure that the activity that's happening in payments and on blockchain is legal and permissible. And so that's been the big shift here in the last 12 months. It's not like all of a sudden we woke up and the technology was perfected. The technology's been working for a long time.
And I think just to be clear for everybody, what's different about the technology, and people will say like, "Well, I can use Venmo, or I can use Interac, or I can use other ways to shoot money around." And that's all true. The backend for that today is the bank payment system. So how the payments actually get fulfilled, you might not know that when you use it, you could use the FedWire, ACH. Sometimes companies will make choices on which rails they want to use, but for most consumers, no one really makes a choice or knows how that money is being routed to get to its endpoint.
And today, we think going forward, there'll be new payment rails. And those payment rails will have different features like programmability, like speed that may or may not go over a traditional bank network. And that is what's potentially disruptive to us as a bank. Today, we very much in the banking industry own 100% of the payment systems. And in the future, we probably won't.
And so the analogy that I've drawn over time is we're kind of like the telecommunications industry was in the year 2000 when they realized that copper wire wasn't going to be the way that people were going to communicate with each other, that there would be other mechanisms that would include fiber optics, and a bunch of mobile and mobile broadband. And if you looked out in the future, there was going to be a bunch of different ways for individuals to talk to one another. Their strategies had to evolve to contemplate what that future state might look like well in advance of the development of like the iPhone, the Android phones, like that wasn't around in the year 2000 when telecommunications companies thought about it. And they didn't understand that there would be streaming from like Netflix, or YouTube, or a bunch of other things.
So I'll put it back to you guys. My view is that we're in that equivalent of like the 2000, 2001 era in telecommunications as it relates to payments and the movement of money where the infrastructure layer still has to be built, but that down the road, there's likely to be a bunch of new innovations, many of which we can't really even contemplate or think about, that when that infrastructure is built, there'll be new product capabilities developed. Do you agree or disagree with that statement?
Elizabeth St-Onge:
I agree. There's going to be a lot of new products. If we go back to there are a number of friction points, or problems, or pain points that our clients are experiencing, this technology opens up brand new ways of solving those problems that we haven't even thought about. Because historically we couldn't solve them in those ways because the technology did not exist. So I do think it opens up all sorts of new avenues and new capabilities.
I think also, and not that I want to open up the AI Pandora's box, but I'll open it up for a moment, the combination of digital assets and AI brings about all sorts of new things that I think sitting here today, we can't even imagine. I think five years from now, this will look very, very different.
Yeah, completely agree. I think this is better infrastructure, better rails. Ultimately, it will become fairly invisible to the end user. It'll just become the underlying plumbing to the payment system and become invisible, but there'll be a period of time where the adoption will have to happen.
The challenge in the interim, just like to your example of mobile phones and cell phones, we will live in a period of time of coexistence where the old rails will continue to exist, and we will have to continue to invest in them, and upgrade them, and manage them as we invest in this new technology. And I would say a decade, two decades of coexistence, similar with phones. People did not eliminate their landlines immediately when they got cell phones in the early 2000s. So this coexistent will happen for a number of years.
Jeff Solomon:
What do you say the biggest impediments to adoption actually are? Why don't we talk about that and then we'll finish up on a few other topics before we wrap.
Davies Beller:
I think the biggest impediments are regulatory clarity, number one, regulatory alignment across jurisdictions. The United States does not control the regulatory paradigm, nor does Canada, nor does the European Union, or the UK, or any jurisdiction all by itself.
Simplicity and approachability of the technology solutions. Five years ago, you needed to be a software engineer to interface with most of the solutions because they were so tech wonky, but today solutions are increasingly consumer approachable. And as I think Elizabeth referenced earlier, this will become infrastructure over time that's not even visible to the user.
Elizabeth St-Onge:
I mentioned a little bit, but I think it's worth reiterating and building on what Davies said around the greatest impediments. I think it's for us in the industry to always ground it back to the client and the value we're bringing the client. I think our greatest impediment is if we lose sight of that. If we become enamored with the technology for the sake of the technology or we get lost in the noise and the hype. But I think articulating to clients what this does and the benefits it brings them, I think is where we're going to see losers and winners in this space. The winners are going to be the ones that understand the client pain points, and understand the client objectives and goals, and can clearly articulate that and then solve for that.
Davies Beller:
If I could pick up on Elizabeth's comments, I would also ask the question, why should banks care? Why should TD care? What is our role in the ecosystem?
I think banking regulators over the past 12 to 18 months, certainly in North America, have reached a conclusion that the genie's out of the bottle. This technology is being adopted. And why I think TD should care is this represents an opportunity for us to continue to grow our leadership position in the industry because this is becoming the financial technology infrastructure that underpins much of what happens in the movement of money or value, what is the definition of an investible asset, how that asset gets traded, settled, custodied, et cetera. This is our opportunity.
Jeff Solomon:
So I agree with you, and maybe that's a good place to leave it. At TD, we are focused almost exclusively on delivering remarkably human, refreshingly simple solutions for our clients.
The reality is that the technology often that sits behind that remarkably human and refreshingly simple paradigm are actually complex. It's stuff we have to solve for. The deliverable itself and the way that clients feel when they engage with our brand is because we've been able to solve a lot of complexity for them and make it easy for them to engage with us. That's kind of what we do from a technology standpoint, and that's what our deliverables are. And so I think it's really important for us to continue to be at the forefront of this because our clients, they may not expect us to be delivering this today, but in the very near future, there will be others who are offering more simplistic, faster, easier solutions, and we need to be in that mix with them. That's, I'd say, is a really critical mindset.
I would also say that it's not either or. And Elizabeth, I totally agree with you, not everybody is going to be using this technology. In fact, in our organization, there's still a lot of people that walk into branches. And there's a lot of people that don't use ATMs yet either. And so there is going to be a period of time in which the existing way we move money and the existing way we engage with our clients, that's not going away overnight. But there will be an adoption curve and it will be increasing as the younger generations are more facile and more digitally native. Those people will be grasping for technologies that enable them to do things at the speed at which they operate.
And why it's important for us to be doing these and exploring these from a philosophical standpoint is if we're not capturing the experiences of that generation in this moment, they will seek out other solutions. And so by the time they get into their late 30s, and early 40s, and 50s, they might be riding different rails. And so for us, it's important for us to recognize that that's an eventuality. Once we've recognized it's literally about marshaling the resources to ensure that we can maintain our client connectivity, which is a very intimate, and very personal, and very human engagement, utilizing the tools that we're developing to enhance that relationship.
And I would say to each and every one of you, whether you're dealing with corporate clients or whether you're dealing with individual clients, the experience is the same. We all have phones, we all have apps on our phones, we all have different apps on the same phones, and we use those apps in a different way. If we could look at the personalization of banking through that same lens, then putting the infrastructure in place that enables that personal experience to happen is essential for the long-term growth of our brand at TD.
And that's what we're doing. That's what Digital Asset Strategy Team is really about. It's about identifying those. And Elizabeth and Davies have identified a few of those really meaningful use cases today, but there'll be so many more things that happen in the future as we migrate ourselves into the digital asset ecosystem.
So look, I want to thank you all for listening today. It's really been a pleasure. There's so much more to talk about. Thank you so much. Appreciate all of your time and attention.
Davies Beller:
Thanks everyone.
Elizabeth St-Onge:
Thank you.
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