From Traditional to Tokenized: The Future of Finance
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Digital assets like Bitcoin and NFTs are being called a possible game changer for how we conduct traditional finance. But we're still a few steps away before the old can merge with the new. Important parts of the plumbing need to be adopted. I think that we are at the point where that is technically possible. Five years ago, it was not technically. I think that it's going to happen starting in the next 12 months.

But the conditions have not been right for that to happen. That's Donald Wilson Jr. at the Wall Street Journal's Future of Everything Festival last month. He's the CEO of trading firm DRW. He joined WSJ's deputy editor-in-chief to discuss how this convergence might happen and why everyday investors should pay attention. That's after the break.

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At the Future of Everything Festival in May, Wall Street Journal Deputy Editor-in-Chief Charles Farrell spoke with DRW's CEO Donald Wilson Jr. about the future of digital assets. Today, we're bringing you that conversation. It's been edited down for time and clarity.

I wanted to dive right in and get going with Don on a whole bunch of topics. And this is the future of everything. And we're thinking about the future and thinking about digital assets and trading and markets and finance. And I will ask you to be wildly speculative and just tell us all the like crazy ideas that you have for the future. And we'll have a lot of fun. So but I want to start with a little bit of history. A lot of people get into digital assets and crypto and other things via a bunch of different routes.

Yours is probably from the most traditional part of traditional finance from Chicago and the derivatives trading pits. And people have been trading derivatives in Chicago in the pits for 160 years or whatever it is. So the sort of the most traditional form of finance and you ended up in digital assets. Tell us what attracted you to digital assets and how did you see opportunity for your firm in them?

We have to go all the way back to 2012. Distant past and very early in the evolution of Bitcoin. And one of the things that I love about DRW is that there are a lot of really, really smart people who love new things and new ideas. And so there were a number of people who worked for me who were very excited about Bitcoin. And so we started having discussions about why is this interesting? What are the implications?

And the general consensus in 2012 in traditional finance was that Bitcoin was something that people used to do illegal things and that there was surely no practical, legitimate use for it ever.

I found it interesting for a couple of reasons. Here's a thing that, and if you agree that there's some value associated with it, which even in 2012, there was value associated with it. You could move this thing from one person to another forever.

almost seamlessly, 24/7, anywhere in the world, most importantly, without an intermediary. Can we just back up one second and tell us why that is so significant? So if you think about stock trading or bond trading or currency trading,

Doesn't look like that, but explain why it's so exciting that this transaction can happen without an intermediary. After college, I started trading in the Eurodollar option pit. So in Chicago, in the open outcry pits, and...

Everything about that process, it looks like two people just agree on a trade, but actually there are so many other steps and so many different participants that have to be involved for that to take place and then for the trade to clear. I mean, we could spend the whole...

25 minutes talking about that. I would love to have a clearing discussion, maybe another time. And you would see this sometimes in real time. So I became the largest trader in the EUR/USD option pit. So this is three month LIBOR options and we would stand down, stand there and provide liquidity, huge size, take down big trades coming in from banks and that were hedging things.

And, you know, what started to happen fairly frequently was we would do a, somebody would come down and quote some huge multi-legged option strategy. We'd take down the other side of it, really big trade. And then 10 minutes later, there would be a block trade that would get reported, but at a worse price. And I was like, okay, wait, I'm the one standing here taking on the risk.

and JP Morgan or whoever it was just provided liquidity to a customer and then scalped a bunch of ticks out of them and then came and laid off the risk on me. And so I had this... Great business if you can get it. Even though I was in traditional finance, I had this kind of very deep skepticism of the value that intermediaries play in the chain of events. So in 2012...

When we started talking about this, okay, now you can move value without an intermediary. That's super interesting. That could be game-changing for traditional finance. And so that gets to an interesting part of the discussion, which is that, I mean, there's a lot of different directions in digital assets and they're going in

many directions, but one of them is people thinking about how you graphed some of the things you have learned in digital asset trading, how you graphed traditional finance back onto that. But people have been talking about this for a long time, but what do you see as the

part of traditional finance that can be brought into the digital space in a most interesting way. Just to kind of continue the discussion that we were having back in 2012, 2013. So what we decided was, you know what, this is a real thing. We're interested in engaging with this technology in a variety of ways. So we started Cumberland, which is our liquidity providing subsidiary for cryptocurrencies. It's now one of the largest B2B liquidity providers.

Just to define liquidity provider, somebody wants to make a trade, you make a trade. That's right. And this is generally kind of a B2B structure.

The other thing we said was, how do we leverage this technology to make traditional finance more efficient, to facilitate what you're calling grafting, which is a very apt term of what's been happening so far. And actually, I don't think it's the right solution. OK, what's the right solution? So we started a company called Digital Asset Holdings, which is headquartered here in New York. And their mandate was to create a blockchain that would actually facilitate traditional finance.

And, you know, as Ethereum developed and some of these other chains, our view was this complete transparency on chain is not what traditional finance is going to migrate to because

if you and I do a trade, I don't want to broadcast to the world what I bought or sold. But back to this grafting question, what a lot of firms have started to do is they've started to tokenize a traditional asset and put it on blockchain. And so what they do is they, maybe a broker dealer says, hey, we want to tokenize a treasury. So we're going to buy a treasury. We're going to lock it up somewhere. And then we're going to issue a token that

represents that treasury, and now you can move that treasury on chain. There are a lot of benefits to that, but by doing that, you've introduced additional risk into the system. Because if that entity that holds the treasury

This sounds a lot like the stock clearinghouse, where instead of trading stock certificates around, you put them in a filing cabinet and you just change the name of whoever owns the stock certificate in the file instead of actually moving the stock between people. But you still have the problem of how do you know that if my name is on the drawer, if I go to the filing cabinet, that they'll actually give it to me? Of course, that's the role that DTCC plays in the ecosystem, is they hold all the stock certificates and those things move around in

in an electronic form. My view is that ultimately, for instance, if DTCC were to issue tokenized equities on a blockchain, then that would be natively

issued tokenized equities. That's very different than what's happening today. And my view is that's where we need to go. And that would not be grafting. That would be- Making something new. Yeah. Are you starting to see that happen in any particular markets in any real size? Or does this still remain a kind of theoretical experimental exercise? I mean, right now, it's a theoretical discussion. And I think that one of the impediments has been that

The characteristics of Ethereum, Solana, et cetera, et cetera, they're super interesting chains. You can do lots of cool things on them, but they don't have the characteristics that traditional finance needs and wants in order to do this. And so I think that's been kind of the... So you think a new kind of chain needs to be...

created. Well, yeah. And so this digital asset has actually created a chain. It's called Canton. The Canton coin is not yet traded on cryptocurrency exchanges. Cumberland does provide liquidity and a couple others do. But that chain, I think, has all the characteristics that are necessary to facilitate this. One of those is configurable privacy. Depending on what use case

you have, you need to be able to decide who gets to see what. If you and I trade in equity, do we want to broadcast the fact that I bought the equity and you sold it to the whole universe? Probably not. Do we want to let a clearing firm know or a regulator know potentially? Or if DTCC is the issuer, let them know? Of course.

And this also goes to moving variation margin, moving collateral. If you tokenize treasuries, now you can move that instantaneously. You can move margin instantaneously. Those are things that really have an opportunity to significantly reduce systemic risk and make markets far more efficient. But again, right now, if you trade on Darabit,

and you have to post a bunch of additional tether as a variation margin, then the whole world knows, "Oh, look at that. Bitcoin just went up, clearly.

This guy is short Bitcoin on Darabit. Correct me if I'm getting this wrong, but also you're taking some risk in some counterparty risk in that you're posting the tether and you have some risk to somebody, right? Well, in that case, you have risk to Darabit. But anyway, yeah, it's not the same as maybe CME. Right, right. So it feels like there's still a lot more evolution that has to happen to solve the intermediary problem. It feels like there's still a lot of intermediaries out there.

That's right. All of this technology, you know, there are important parts of the plumbing need to be adopted. I think that we are at the point where that is technically possible. I think that five years ago, it was not technically possible. I think it's going to happen now. I think that it's going to happen starting in the next 12 months. But the conditions have not been right for that to happen. I want to talk about broader adoption of plumbing.

non-traditional assets. There's a lot of discussion about whether individual investors should be holding them. There's some very sort of traditionally traditional finance people who say stuff to someone, to my surprise, say stuff like we should have 10% of your portfolio in Bitcoin or whatever. Do you think that the market is mature enough for individuals to be participating in a meaningful way?

I think that their opinions on this are all over the map. Personally, I think it's totally reasonable for somebody to hold some of their assets in Bitcoin. That seems like a prudent thing to do. The other thing that's opened up by this technology is the possibility that less liquid assets become more readily tradable. And that's a theme that everybody's been talking about for a long time, this idea of tokenized real estate.

We did an experiment with that a long time ago. I don't know. It was probably eight years ago. And we found that the set of people who were interested in buying real estate and the set of people who liked the idea of tokenization, there was zero overlap. And so I think that that was too early.

Private credit, that's another thing. Can you tokenize private credit, make it more readily available? Can you use DeFi protocols to put leverage on unleveraged tokenized real estate or tokenized private credit? Maybe. This all sounds like stuff that is of extraordinary interest and obviously quite profitable to professional traders and big trading firms.

Why should an individual investor get excited about this? There's obviously this very kind of paternalistic approach right now by the regulators that says, if you don't have certain characteristics, you can't invest in

a bunch of things, right? And generally, private equity has outperformed public equity over the long run. And so private credit generally yields more than alternatives, risk adjusted. And so making those asset classes more available and this technology is probably an essential part of that.

That's WSJ Deputy Editor-in-Chief Charles Farrell speaking with DRW CEO Donald Wilson Jr. And that's it for your Money Briefing. To hear the full version or check out more from the Future of Everything Festival, click the links in our show notes. Tomorrow, we'll have our weekly markets wrap up What's News in Markets. And then we'll be back on Monday. I'm your host, Arianna Aspuru. This episode was produced by me. Jessica Fenton and Michael LaValle wrote our theme music. Our supervising producer is Melanie Roy.

Aisha Al-Muslim is our development producer. Scott Salloway and Chris Sinsley are our deputy editors. And Falana Patterson is the Wall Street Journal's head of news audio. Thanks for listening. Isn't home where we all want to be? Reba here for Realtor.com, the pro's number one most trusted app. Finding a home is like dating. You're searching for the one. With over 500,000 new listings every month, you can find the one today.

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