TradFi is Building on the Avalanche Avax Blockchain... Here's Why | Morgan Krupetsky

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the Thinking Crypto podcast. I'm your host Tony Edward and we are recording at Station three in New York's Financial District. And joining me today is Morgan Krepetski, who is the vice president of on chain Finance at Ava Labs, which is the technology company building the Avalanche blockchain. Prior to joining avle Labs, Morgan spent time at City almost over a decade beginning with roles focused on institutional FX and macro,

covering hedge funds, asset managers, and pension funds. Morgan, Great to have.

you end up in finance?

But in you know, my schooling, I was attracted to macroeconomics and so did kind of a series of internships in various parts of financial services and found that I really liked it, and so started at City right after I graduated in the kind of institutional rotational program, specifically within sales and trading, and stuck around for quite some time.

While I was still at City, I had a couple other roles kind of in the process before diving into crypto and digital assets, which I know we'll talk about that was kind of my foreign and TraFi.

was her chief of staff, and kind of through both of those experiences, I saw, you know, how end to end processes worked, not just as it related to trade execution, but also post trade a lot of reconciliation, middle and back office processes, the kind of managing of risk and controls, and saw kind of firsthand how those things were linked and inherently I saw how sometimes processes would inherently not necessarily run smoothly because and this is not necessarily just

specific to city, but I think it's any large bank or any large enterprise or institution that you know, because it's the result of you know, very like older a lot older systems, and sometimes M and A and sometimes you know, lack of prioritization in terms of spending the

time and resources to actually streamline systems. A lot of the times, uh, there would be you know, manual processes that would be put in place, kind of maker checker type of processes where inherently systems wouldn't talk to each other and therefore, you know, bodies would be thrown at having to reconcile things internally, let alone when you talk about going from kind of one institution to another institution, and so as I was you know, observing this, at

the same time, we had you know, the last cryptobal market, and I got a lot more interested in kind of going down the rabbit hole and really understanding what the tech was about. And so my kind of fury into this space was less on like the bitcoin maxie side of things and more of like, how can we use smart contract capabilities to really upgrade legacy financial services infrastructure

and institutional workflows. So it's really not like the sexy part, it's like the plumbing, but it really kind of got me excited because I know, took a step back and saw the potential of what the tech could do as it related to really upgrading how processes would work within financial services, but also obviously kind of other industries as well.

seeing City, along with other banks and Wall Street firms are all integrating blockchain technology. It's not just about bigcoinner bitcoin ETFs, but tokenization stable coins using blockchain to move information and data. All that's being built now.

asset strategies. And so that was a lot about educating institutions around not necessarily what was blockchain, because at that point, luckily, I think they were more or less ish on board, but they had digital asset teams, but it was what is avalanche, what are the differentiators in the usps, and how can we leverage the underlying technology too. And we'll get into this, but basically, either upgrade how we do things, enter net new markets, capitalize on net new revenue opportunities.

And really since then, the worlds of trad FI, DeFi, c FI tokenization have really converged and I think will continue to converge. And so at this point, you know, while before I think there was like a spectrum of different types of financial services institutions in terms of those that have been really progressive for a while and those

that were very new. I think, especially after the election, it kind of gave a green light for a lot more institutions to really start standing up digital asset teams, hiring digital asset heads, to really kind of create both, you know, to your point, a crypto and digital asset strategy as well as more of like a blockchain strategy.

really help the industry's cause. Luckily from an Avalanche standpoint, and we'll get into this, but Avalanche really allows institutions to stand up their own private permission environments if that's what they want or if that's what the use case

kind of demands. And so we luckily early on had a little bit of a wedge even four years ago in working with the cities and JP Morgans of the world, where you know, historically they were used to building on what we would call like enterprise chains, like a hyper ledger that was fully isolated from you know, the DeFi

innovation and composability and n with avalanchell ones. It really allowed them to like step into the world of public permissionless in a way that still allowed them to you know, address a lot of their compliance and regulatory requirements, but start to get a little bit closer to you know, the public permissionless realm DeFi innovation, composability and now, especially after the election, there's still definitely use cases that demand

private permission networks. But really there has been such a turn in the tide of Okay, now we really gotta do something in the space. We have to figure out what it is, why are we doing it, and really start to operationalize and in production various types of use cases.

the content. Thank you so much. And Morgan, it's fascinating because you're seeing even the detractors are now capitulating, if that's the right word. Yeah, And we're in this race, and it seems that the direction to Puck is heading in is blockchain rails powering markets and the economy. It seems that's what the end goal is.

reflected in common kind of token standards. It provides for the much more seamless transfer of value where you know, historically enterprises were built on systems that inherently don't talk to each other, whether it's intra company or inter company, and as a result of that, historically that's why we saw a lot of intermediaries pop up, or the need for intermediaries to pop up to basically take data from one place to another direct concile it right, which is

inherently not automatic and error prone because a lot of it's a lot of the time it's governed by manual processes. And so to be able to instead leverage you know, sometimes I call it like the world's Excel sheet that you know, inherently you can see how value whether it's on a wholesale level or on a retail level, how that could really help to upgrade, you know, how we work today.

things that are being built on the Avalanche blockchain, for the viewers and listeners who may not know, give a quick overview of Avalanche as a blockchain and the capabilities and things like that.

So that's DeFi primitive stable coin integrations, custodial integrations, on and off ramps, tokenization platforms, so on and so forth. And so when people think about Avalanche, oftentimes they're thinking about the activity that exists on the liquidity hub or Avalanche seachain. However, the network also allows builders, whether that's a government agency, a financial services institution and enterprise, to stand up its own individual or series of customizable layer

one blockchains that can be public and permissionless. They can be private and permissioned, or they can be hybrid, they can be public and permissioned, and so importantly, those networks are natively interoperable with each other as well as with the Avalanche seat chain, which means that just because you're launching your own chain, doesn't mean again you're in isolation.

You can bring in USDC, USDT users, other types of tokens into and out of your environment two sea chain or to other networks if that's what your kind of use case demands for. And so in general, you know, when we talk to different types of partners, we don't we're not necessarily prescriptive to say you have to launch on Avalanche teachain or you have to launch your l one. It's very dependent on the particular use case and the application and the particular kind of compliance and other types

of requirements. And therefore it doesn't necessarily as a network beholden a partner to a particular network toolkit or logic. It's really dependent on the particular use case. And so that customizability, the ability for you know, regulated financial services institution, let's say, who's building a collateral mobility platform to really cater the network and the chain to the use case. And that includes things like permissioning across validators, transactors, smart

contract deployers. It doesn't necessarily mean that validation if it's permission has to be centralized. It can be distributed among a whole host of institutions who have an economic or business interest in validating that network. But it's very malieable. And so that customizability we found has really resonated with a variety of different types of builders.

let's use JP Morgan in city. So let's say they both build on I don't know what makes sense to see chain or you know, one of the their own l one version. They have the privacy, so JP Morgan can see cities information and vice versa. But if they want to transact with each other they can correct.

one environment. So for example, if they're building again like an engine for collateral mobility or an exchange of some kind, that might be more conducive for its own l one. Now, within that l one, to your point, you can have a variety of different institutions interacting and trading, but when it comes to settlement, perhaps it makes sense to settle

those trades back on their respective networks. And if that's the case, let's say, you know, two institutions come together, they decide on a particular trade, the asset and the payment can settle on the respective institutions l ones and do so in a way that doesn't require third party bridges or third party assumptions because it's using avalanches, native intra network interoperability capabilities, and so there's a bunch of

different kind of configurations. And again it just depends on and we always sit down with institutions and sometimes they kind of like think they know what they want, or they're saying we absolutely need this, and I'm like, you actually don't need that. Here's a more efficient way to kind of solve that. So we always try to get to the crux of like what are you trying to solve?

Why do you think you need what you are saying that you need, And then let's talk through different ways to express that need from a blockchain architecture perspective and help you help you get there.

of of what's being built with these institutions, because many of them you alluded to this, they kind of have the wall gardens, right. They tried to build their own internal permission chain, which is fine, but now they're noticing, hey, we need to get to public chains to sell and communicate with other folks, Avalanche being one of them. So when they transact, how is that data or money or

whatever it is going back internally? So and this is where your perspective is going to be great because you worked at a bank, so you know how this all works. So if city's operating on this l one an Avalanche, how does the value of whatever you're doing get back to the bank itself? Yeah?

that they will. But a lot of them are either already have or are working on tokenized deposits, right, And so that I guess, in a certain sense from a token standard perspective, is very similar to a stable coin like USDC, but inherently it reflects the token reflects a tokenized deposit or a deposit that exists already within the bank and that is within the bank's custody, and so it's kind of similar in that sense, and that in this case, I guess City it would be the issuer

of the of the tokenized deposit. But hopefully we'll get to a point where where a lot of these financial services institutions can start to really custody at scale stable coins, in which case that would probably follow the same model

that any institution kind of custodies a stable coin. And in the case of USDC, for example, if an institution is building let's say on their own L one and they want to pull in let's say USDC from Avalanche Teachain into their environment, they don't necessarily have to contract with Circle to integrate native USDC onto their network, because that's probably going to be a very difficult proposition to get Circle to do that. I'm sure they have a

large pipeline. They don't really care about necessarily integrating all these different chains, whether they're l ones or L two's, and so what would happen instead is that through avalanches native interoperability protocol, they would basically pull in USDC into

their environment. And I think I mentioned this, but the interoperability that doesn't necessitate in the context of Avalanche third party bridges, and so it really relies really just on the two validator sets of the network to facilitate that innerchain messaging. And so for example, let's say you have a city chain and a JP Morgan chain. Presumably those chains are permissioned. They have a permissioned validator set, probably

run by city in JP Morgan respectively. City. In the case that they want to send an asset or a payment to JP Morgan, they would pay that network to say, hey, we want to send you whatever ten tokenized deposit units. The validators of the JP Morgan L one would basically look up on the validator registry of Avalanche, which is held on the Avalanche Pea chain, and say, who is sending me this message? Oh, this is the validators of

the City network. We trust the City network to receive that message and to receive that that payment, and they choose to accept that message, and therefore that transfer or that message happens and goes through again just relying on those two already known and trusted validator sets. So that would be an example. I mean, obviously you can send payments assets, you can paying a chain for has this

transactor been ky seed? There are so many you know, there's a very low level and the kind of arbitrary protocol that you can layer on on top really anything that you want. But those are kind of some examples from an institutional perspective.

a lot so ETPs. You've got broad Ridge payments, infrastructure and much more. I would love to dive into talk to us about these things and also dive into broad Rage.

them tech enablement partners. And they're the ones who we basically work in tandem with on a kind of go to market or bead strategy and ultimately reaching out to different types of businesses that would benefit from the blockchain enabled product, services and capabilities that those tech partners bring to the table. So that's you know, the ecosystem at

a high level. Obviously we have a robust and top tier kind of DeFi ecosystem, but even the DeFi primitives that exist on Avalanche, between various types of vaults, infrastructure, borrow lend protocols, I almost look at them as kind of top of the funnel where even those protocols we actively pitch two different FinTechs, wealth tech platforms and eobanks to embed in their back ends to start offering new product,

service and capabilities to their clients. So I almost see like the DeFi partners as tech enablement partners in the same way. So that's really kind of the commonality. And I think in general, as we really pivoted to focus on this like better business strategy, it's really about how do we via our partners deliver better business outcomes. Is it cutting of costs, is it creating efficiency, is it entering in at new market, capitalizing on a new revenue opportunity?

And largely when we pitch to the these ultimately end clients, we don't really talk about avalanche. We talk about the business benefit that that business gets by leveraging a slew of tech enablement partners on avalanche. Most of those customers

don't have large digital asset teams. More necessarily should they, who should be thinking about building all of this stuff from scratch, And so the ideas that they are sold on the capability and there is an agreement that is kind of struck between them and the tech enablement partner, and it happens to be on avalanche, and that's how

it should be. Right, Like people shouldn't know or care what network they're using, if they're even using blockchain, and that's really kind of the go to market motion that we strive for as it relates to broad Ridge in particular, maybe just as a summary, a few weeks ago, we announced with broad Ridge that they have built a purpose build to L one and Avalanche l one within our network, and it is really meant for the transmission of corporate

actions to a variety of different platforms, not just on Avalanche, but across a variety of different chains. Today, broad Ridge is a huge piece of you know, financial market infrastructure

in the world of trad fi. Specifically, again as it relates to corporate actions, I think they cover you know, over ninety percent of you know, US equity corporate actions today, corporate action communications today, and oftentimes it's still via like mail, like paper trail and in this world where you know, and we'll talk about this as a theme, but more and more companies are exploring tokenized equities, both kind of as a mirror token as well as native on chain issuance.

Broad Ridge really saw this as a way to start to explore how to upgrade their own kind of infrastructure and rather than potentially sending via mail exploring, Hey, if somebody has a wallet with you know, Google Shares and Apple Shares, how do we send the communication the opportunity to vote, for example, to somebody's wallet directly, right, Because all of this information, again is on chain on a public ledger, is there a way for us to do

that directly and therefore maybe make it again the process more efficient bypass certain intermediaries that are now no longer needed or the need for them is kind of reduced. And so it's really their answer to start to kind of come into this new world where equities are now natively issued on chain.

and maybe less so crypto casino. I mean, I know prediction markets are obviously huge, but even there, I think there's there's an effort to kind of like institutionalize or professionalize them a little bit more so and so I think that there's a lot of scope to see that like market grow up as well.

more talent into the space, and new innovation and new kind of opportunities for adoption.

of look, I'm a techie, I was early to this, I was. It pulled me in, right, It had a gravitational pull because I love tech. But I think about my mom and dad and for them to even invest in bitcoin or crypto, they probably want Fidelity, you know what I mean, because I did trust Fidelity, Trust JP Morning. Those are names companies they worked with, have accounts with already. And if I want them to use certain types of apps to do web three things, they probably want to

use a brand they're familiar with, not necessarily a crypto startup. Again, it's all about demographics in the segmentation of.

And by the way, this is not financial advice, but I think various institutions just want to ensure that their clients kind of have at their fingertips what it is that they need in the way that they are comfortable with accessing it, which is also I think why we saw a lot of popularity with the crypto ETFs right, like it provided a new but traditional way to access new asset in a way that I think a lot of institutions and individuals were comfortable.

ETF recently which is huge, and there's a lot a lot more coming, I would imagine.

And so I think the more kind of partners we have of the ecosystem working on education telling the story not just of the platform, but also to your point, the use cases that are being deployed on the platform, the better. And so definitely excited to see that.

to see from like an order of operations standpoint point. UH. You know, in general, banks have been not quick, but have definitely prioritized offering kind of crypto products, you know, obviously starting with the basics UH to their customers with ETFs, and I think over time we'll start to see kind of a lot more blockchain based UH products being offered, ideally with the blockchain components being abstracted away, but a lot of different companies are looking at kind of issuing wallets,

digital wallets, not custodial wallets to their customers, and then through that there's so many different you know, products and services you can offer to your customers through that channel. And so, you know, I think over the past year, I've really seen it, seen it accelerate.

past this year, plus the Genius Act rolling out, will help boost more adoption, more building, We're going to see the next wave of innovation, so to speak.

example of that what happened post Genius. There was this such a renewed push and focus on stable coins. It was no longer you know, what is our blockchain digital asset strategy, but what is our stable coin strategy? And we saw not just banks, but a lot more types of enterprises Western Union, PayPal, others really really kind of push forward in the space. There was a lot of m and a activity obviously in the specifically within the stable coin space that has and likely will continue to happen.

So if that's any any indication, I think clarity and just further global you know, regulatory clarity can only be a net positive in terms of giving institutions the green light to really start to productionize and scale a lot of their deployments. And so from a tokenization standpoint, I think inherently that you know, that will help as well in terms of kind of themes that we've seen from

a tokenization perspective. You know, I've always considered stable coins as like the quintessential tokenized asset, and so obviously stable coin market cap over time has grown tremendously and I think as a result of that, a lot of institutions saw that growth, especially asset managers, and they're like, oh, stable coins, inherently, don't you know, offer yield to the

to the holders of those stable coins. I know that's obviously a hot topic as it relates to clarity, but I think that really was an impetus for a lot of asset managers to start offering money market funds or tokenized money market funds. Obviously, there's a whole slew of asset managers who who have launched tokenized money market funds, many of which are on avalanche, and so to date a lot of the kind of subscribers or buyers of those money market funds have interestingly been stable coint and

synthetic dollars shoers. And then I think, uh, you know, by extension, fintech's well tech platforms and neobanks who are starting to be able to offer to their customers, you know, digital savings accounts as generated by by money market funds. So I think we'll see that continue. And I think by extension there we've started to see uh, especially kind of the synthetic dollar issuers waiting into the world of private credit and other types of fixed income products, and

so I think I think that will continue. There's obviously been a very big theme around tokenized equities, which I think will continue. There's a lot of initiatives out there between UH, super state and others working on native on chain equity issuance, which I think is a long road, but it's definitely worth it because that is really where you start to see actual like efficiencies in the end to end process, not just of issuance, but you know, trading, clearing, settlement,

so on and so forth. And then in addition to that, you know, we've been very focused specifically on private credit, asset backed finance, fintech lending, which we can talk about, and really everything in between. So we've seen a lot. I think, you know, the space will will continue to evolve, and it's it's exciting to kind of see right infoferent types of institutions getting involved as well.

moment in history because Morgan, we're about two blocks away from the New York Souck Exchange Wall Street, and if we're going to twenty seven twenty four to seven markets, there's not going to be an opening and closing belt. That's going to be a thing of the past. We're gonna go it's gonna be I don't know, the bell is going to be put in a display, right, and.

also twenty for seven settlement and gross settlement. Right, So theoretically assets and payments are going to be swapped, swapping or can be swapping in gross or engross in gross in a way that might not necessarily be uber capital efficient for institutions. And so just because that can happen,

there's a question of whether it should happen. And so rather than just continuously swapping and settling assets for payments, maybe it makes sense to net trades on a on an intra day basis more regularly that in a way addresses a lot of the kind of counterparty credit risk and other types of risks that you know, clearing house is kind of addressed today, right, But do you have

to go to the other extreme, like maybe not? And so I think there's a lot of kind of innovation and thinking to be done from a business standpoint of what and in regulatory of like what actually makes sense in the context of the business as it marries to the technological capabilities.

all of your credentials and technically tokenization platforms can read those credentials and determine that you are KSC, that you're an a credited investor, But from a regulatory standpoint, that's not necessarily doable today, and so it's solved by the tech. But how does the kind of regulatory part keep up and evolve? You still have a lot of those kind of open questions.

lending and borrowing and the whole DeFi aspect or ecosystem on Avalanche. I'm a big believer in DeFi, but it feels like we're still in version one point where there's still tweaks that need to be made. We still see exploits. You know, what's your outlook on DeFi, but also you know, tell us about what's being built on Avalanche.

really at scale. And so I think it's mature enough at least to see that convergence to the point where to your point, is your mom going and getting like a loan on ave. Probably not, But to the extent that those types of capabilities are powered in the back end on fidelity, like that could be really interesting. I think. I think there's a bunch of innovation happening in this space. I think vaults infrastructure is like the hot topic in

meta today. A lot of different types of asset managers are exploring the idea of being curators and using the capabilities of the vault infrastructure and overlaying like a regulatory lens with being able to form capital more quickly and more efficiently, to be able to distribute funds in a more efficient way in terms of like fund disbursements and allocations.

And so I think like the DeFi primitives are being considered in the context of like how again how tratfy operates today, things like term loans I know, are being explored as well. Right, so if you have like a loan on a certain platform, it's kind of annoying to like continuously monitor LTV and your positions so to the extent you can kind of take out like a term loan. I think that's something that is actively being explored today.

So the building blocks are there, but there's definitely tweaks, optimizations, and net new innovations that are that are being explored, especially with the introduction of more and more real world

assets or tokenized assets coming into this space. As these you know, various looping strategies are explored, there's a lot of things that people are working to figure out as it relates to on chain nav as well as liquidation mechanisms, particularly for less liquid assets, And so I think all of this stuff is actively being worked on today.

twenty twenty three. I mean a lot of it was stuff that already caused kind of blow ups in trad fy in some way, shape or form historically, which is why we have certain like market structure, regulation and standardization, and so I do think to your point, there will be a little bit more kind of like institutional rigor and and an innovation that's hopefully kind of overlaid on some of these cryptonative primitives.

What do you what are your priorities? What are you doubling down on?

no there's no clearing house, there's no exchange. It's very bilateral as it operates today, and it's really an area that I think is still very pig not standardized, and really can therefore stand to benefit from this tech being blockchain, stable coins, tokenization, and smart contracts, and so to the extent that this tech can really be introduced as upstream as possible in the origination of loans, for example, you can start to kind of create an environment an opportunity

for verification and servicing to be done on chain as well, and as a result of that really start to chip away at a lot of the third party service providers that currently today take a ton of fees between the ultimate borrower and the ultimate lender, where you know, at scale you can start to even provide more competitive rates

to borrowers and better rates of return to lenders. And so this is a space where we're working with a variety of different capital partners, credit infrastructure platforms to bring both crypto or blockchain native originators as well as web two thin tech originators onto avalanche by way of by way of this tech, where again, it solves real world problems for the space, right like the prevention of the double pledging of collateral, the ability to kind of monitor

collateral in real time and do kind of compliance risk management in real time as opposed to on a delay by thirty days via PDF. All of these things are solving real world problems for the kind of ABF space which we're really excited about. And so that's one of the few areas that we're very focused on. Obviously, stable clint adoption by both retail as well as kind of institutions on a B to B and wholesale payments perspective is something that you know we have and continue to

focus on as well. And then tokenization in various shapes or forms. But but I say a lot, so let me pause.

rapid fire. Favorite food.

don't like horror movies. So favorite book. I've been reading a lot of books around kind of like spirituality and manifestation and positive thinking, which really helps to offset a lot of like the deep digital asset, crypto smart contract research that I do on a day day basis. So so it's been good to kind of balance it out with those types of books.