On this week's episode of The Crypto Mile our host Brian McGleenon is joined by Ralph Kubli, a board member of the Casper Association. Kubli articulated the transformative power of blockchain technology for the global financial sector, labeling it the "single most important technological innovation in finance" since the computerization of banking in the 1960s. However, he warned the current state of financial asset tokenization was "abysmal".

Video Transcript

BRIAN MCGLEENON: On this week's episode of "The Crypto Mile," we speak to Ralph Kubli, board member of the Casper Association. We're going to speak to Ralph about the importance of blockchain technology for the entire global financial system. Ralph believes blockchain is the single most important technological innovation in finance since the arrival of computers in banks back in the 1960s. Ralph, welcome to this week's episode of "The Crypto Mile."

RALPH KUBLI: Thanks for having me.

BRIAN MCGLEENON: It's great to have you on. Ralph, now can you explain why you believe blockchain holds such potential?

RALPH KUBLI: Yeah, so think of blockchain as an extremely powerful database that you can also add some intelligence and make highly secure. And when you think about financial innovation, I really like the definitions that the founder of SEBA Bank, one of the two digital banks in Switzerland, the crypto banks in Switzerland, introduced. His name is Guido Buehler. And he always had basically four principles that really illustrate the power of blockchain in finance.

The first one that he referred to is, blockchain enables the most efficient transfer of value. The second one is, the trade is the settlement. And the third one is, the private key is the perfect collateral. And the last one is, tokenization is origination. And as you can see from those four elements, it touches on really the most profound elements of functioning of finance. So we are really building an infrastructure to more efficiently transfer value, and this is why we believe that blockchain is so relevant in finance today.

BRIAN MCGLEENON: So where are we at in finance today? What is the time frame to get this rolled out so it becomes commonplace?

RALPH KUBLI: So obviously, a lot of participants currently talk about tokenization, and more specifically, they start introducing terminology like tokenization of real world assets. That is great, but I think it's a misnomer and a very imprecise description. The finance and accounting professionals over the last several years have thought pretty hard how to classify items on balance sheets that reflect the real world. And I believe that we should stick to those categories. So one is financial assets, intangible assets, and tangible assets. And I think it's incredibly helpful to really think in those categories when we talk about tokenization.

BRIAN MCGLEENON: So Ralph, just to jump in here, so can you give me an example of a tangible asset?

RALPH KUBLI: A tangible asset would be a building, a machine, a car which lives on your balance sheet in a company, it can be a financial company or an non-financial company, or on your personal balance sheet as an individual, obviously. And the tokenization of those assets is, quite frankly, not possible. You cannot live in a digital house, unfortunately.

So when you tokenize assets, physical assets, that exist in the real world, you would have to have a legal concept that links the representation of the asset on chain to the real physical existence of the asset. The first innovators in this area were really Liechtenstein and Switzerland that kind of made it possible to reflect ownership rights of assets that were represented on blockchains, even if they lived in the physical world.

However, then the question always becomes, What legal concepts do you route then the ownership rights and any rights that are described on chain to the execution of those rights? So for example, if I have a fractional ownership of a piece of a Picasso that is somewhere in a bonded warehouse, well, OK, how could I really reclaim this kind of my 30th of the Picasso or not?

When you then move to financial assets and intangible assets in comparison, their tokenization is a lot easier because financial assets and intangible assets are, per definition, already digital. The tokenization of those assets are a lot simpler and more straightforward because they already live digitally.

BRIAN MCGLEENON: If we tokenize most of the assets in the world, they're all on chain. They're all using distributed ledger technologies. What's the worst that can happen?

RALPH KUBLI: The worst case, in my mind, is that we repeat the mistakes that we've done in the past. And some of these mistakes are, for example, very unclear definitions of the cash flow obligations, the payment obligations of certain parties to these financial contracts.

So basically, what happened in 2008, if we repeat the same mistakes that happened in 2008, which means ill-defined cash flow obligations, not machine-readable and not machine-executable term sheets of financial instruments, If we continue down this path, then we will have a system that is much more chaotic and a lot less secure than what we even have today.

BRIAN MCGLEENON: I recently heard you speak, and you described the current state of the financial asset, tokenization as abysmal. What do you think needs to be fixed here?

RALPH KUBLI: Yeah, so I'm very concerned when you look around a little bit in what happens in financial assets tokenization is that many tokenization infrastructures and platforms basically take a PDF of the offering document or the prospectus and take a hash of this PDF and put it in the token and call this then a bond token. So that is really no innovation whatsoever, and it doesn't bring a lot of efficiency either.

The second, even worse, situation is that somehow someone defines certain aspects of the obligation of this bond in some pieces of code, which then get entered into this token, and that makes it just less well understood because it doesn't follow a standard. And even worse, in many cases, only the asset side is represented in these tokens. And as finance professionals know, an asset side without a liability side is an incomplete financial instrument. You always need to represent both the liability and the asset side.

BRIAN MCGLEENON: So when you look at different jurisdictions around the world, say US, got like legislation coming out in Hong Kong, we've got the EU MiCA, who do you think is ahead of the game? Who do you think is going to get there and classify this and categorize this correctly?

RALPH KUBLI: I think many jurisdictions are working on the right environments. They define how should the rails look like, so to speak. However, we believe that the actual definition of the financial instrument is many times forgotten, and we believe that only an algorithmic financial standard will bring relief in this space. So when you think about what an algorithmic financial standard is, it basically defines the payment obligations of the parties to a financial contract.

So it's very clear what the issuer, for example, or what the owner of this financial contract has to provide to the people that hold the rights to receive cash flows. But many regulators and also many jurisdictions now are at the point where they assign rights to these tokens. It's clear how financial intermediaries and how infrastructure providers can interact and what they can do with these tokens. So that is a big step forward.

And you can already see excitement building in a European environment in kind of an arbitrage play against the United States, what could be possible based on MiCA, and of course, then Hong Kong is pushing, and Singapore is pushing. So it's very interesting to see. But still, what they haven't yet settled on is a clear definition of the financial contract. And we believe that without a machine-readable and machine-executable term sheet that is based on a standard on an open source standard, we will not see the efficiencies that we would like to see in the system.

BRIAN MCGLEENON: Other things are less so successful when it comes to use cases, such as NFTs or tokenization of other assets. Do you think we should just stop there, we should just stop the tokenization of cash and cash equivalents, or do you think we can expand this?

RALPH KUBLI: So I think the tokenization of cash and cash equivalents is extremely powerful. As you can see, there is a few players already putting this into place. The most prominent is JP Morgan. The reason why a lot of the private equity firms are really trying to work on the tokenization of their fund shares is just much more efficient, administration, fund administration, assertion of ownership, et cetera. So that in itself is already a big innovation and much more efficient. So think about collateral management. Think about repo markets, et cetera, will be much more transparent and secure with this kind of environment.

My concern is that in order to really bring financial innovation and drive down cost for highly sophisticated financial instruments and capital accumulation, for example, in emerging markets, we need to properly define debt markets. We need to properly define debt instruments so they can be handled with more automation and with more machines. And of course, the risk that is inherent in today's massive, massive derivatives positions throughout the world could also be much better managed with financial instruments that are based on an algorithmic open-source financial standard.

BRIAN MCGLEENON: Do you think there is still a sense that this technology if it's combined with AI as well, It could disintermediate a lot of different structures that exist today?

RALPH KUBLI: It will disintermediate many players. But there's a reason why banks exist. There is a reason why exchanges exist and why they're regulated. So I don't think it is the right approach to say decentralization and DeFi, which I believe is very narrow and quite incapable of scaling, is the solution. It will not replace existing players. What we really need to strive for is that we do it right. We build the next iteration.

As I said, after the introduction of computers in the 1960s, we have now a chance to build a financial infrastructure on a much better technology. It all starts with finance. So it starts really with the proper definition of the financial instrument that then is combined with the unique opportunities and the unique properties of blockchain, which bring observability, visibility, and enforceability.

However, when you think about the efficiency gains, and you're asking me whether people are afraid of working with us or whether people once they see the opportunity here, they get afraid, I would say that they're actually quite contrary. They're excited. Because when you go into these banks, they know how difficult it is to reconcile their own books.

And just a few months ago, when some of these banks in the United States collapsed, and most famously, one of the largest-- one systemic relevant bank in Switzerland had to be absorbed by another bank, people that are inside the industry, we know that we were very close to a disaster.

So we have to find better ways to bring this transparency and also efficiency into these organizations because the risk just becomes unmanageable. If you combine a properly defined financial contract with the unique capabilities of blockchain, you get indeed more transparency where it's needed and allowed, and you get, clearly, more reliability. You get an assurance layer that will create the kind of reliability that you need in order to securitize financial instruments. That is really the holy grail of this technology, I would say.

BRIAN MCGLEENON: Ralph Kubli, thank you very much for coming on this week's episode of "The Crypto Mile."

RALPH KUBLI: Thanks for having me.

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