How Tokenization Could Change Stock Trading Forever (ft. Matthew Hougan)

0:00Welcome back to the rundown interview edition today. I am talking to Matt Hogan the chief investment officer at Bitwise, one of the largest crypto-focused asset managers in the world. And Matt is joining us at the perfect time because this was a big week for crypto and we got into it all. Matt explained why he thinks the clarity act failing in the Senate won't be a huge setback for crypto. He also explained why the new exemptions by the SEC for stock tokenization is a big deal and other reasons to be optimistic about crypto moving forward. This was an awesome conversation that you guys are going to really enjoy. So let's get into it. All right guys today we are talking to Matt Hogan the CIO of Bitwise, one of the largest crypto-focused asset managers in the world. Matt welcome to the rundown. It's amazing to be here thanks for having me. Well I'm so happy you could join us this week. There's a big week for crypto I got to say there's a lot happening. I want to start with the clarity act. That was like the main headline this week, the clarity act did not. It failed to advance in the Senate this week.

1:04I just want to get your take as someone who follows the stuff all the time. How big of a setback is this for the crypto industry because for the last years so I've just been hearing nonstop you know buzz and hype around the clarity act and if it's going to get done doesn't get done. Now where does that lead the crypto industry? Yeah it's a great question. It depends on your time frame. That's why it's a little bit frustrating. So the reason we wanted clarity is because legislation is hard to change. So if you think about the history of crypto over the last like seven or eight years we had a very anti crypto SEC led by Gary Gensler and then we have today a very pro crypto SEC led by Paul Atkins and in the anti crypto SEC it was hard to get things done. It was hard to launch an ETF. It was hard to have big institutions move into crypto. It was challenging for the price in the pro crypto SEC that we're in now. It's easier to get things done. We have a large variety of ETFs. We have regulated futures. You see Blackrock and Nasdaq and Nizy building on crypto based rails. What the clarity act was about was putting in pace legislation that would last

2:07multiple administrations. They couldn't be overturned by a change in the SEC. So that's what makes this moment so interesting because the reality is with the clarity act failing the people setting the rules for crypto are the SEC and the CFTC who are very pro crypto. So for the next two and a half years we're going to have very pro crypto rules but the worry is what happens in two and a half years. So it's sort of timeline dependent. It's it's we're in a great place now. If we had clarity we would have been in a great place forever. Now we're in a great place but with some uncertainty in the future and that what makes it interesting to be an investor in crypto right now. Right so like it you were trying to lock in some certainty in some like you know without having the rules changing every two to three years based on who the who's in the White House. Now there's that uncertainty again depending on you know who's in charge of the SEC CFEC in two and a half years. You got it that's exactly right. It's all about certainty versus uncertainty. Make no mistake it would have been better if it had passed. I think if it had passed crypto would have been the consensus hot

3:09trade in the fourth quarter of this year would have been a runaway bull market. Now I still think the situation is is pretty good for crypto but as you said there's more of this downstream uncertainty that we just going to have to wrestle with as an industry. Well I saw that you know you said before the vote that you were less worried about its failure than you were earlier this year like you still thought that it wasn't going to pass but you weren't as concerned about it not passing anymore. What changed between you know everyone was wanting it to pass and how it was so important for crypto and then now not being as worried about it. Yeah there are two things great question. The first was that the market priced it in failing right going into the vote yesterday before there was this little blip up the market had if you looked at polymarket or calcium the odds of it passing had fallen to like 15 percent. If it's already priced in as failing who cares if it fails right it's not going to impact price. The other reason was the SEC and the CFTC were just very aggressive about saying we will fill the hole if this thing fails. I think chair Paul Atkins of the SEC went on CNBC and said

4:14we're ready willing and able to pass rules that cover what clarity would have covered. So when I looked at it I was like well look it's already priced in we're going to have a pro crypto SEC and my guess and this is probably the most important point. My guess is after two and a half years of growth it'll be too big to put crypto back in the bottle. We may not get the same level of SEC support in the next administration that we have today but we're not going to go back to the Gensler era because BlackRock is going to be in it and Goldman Sachs is going to be in it and Nasdaq is going to be in it and Nizzie is going to be in it. We would have gotten escape velocity. It's kind of how like Uber was quasi legal but then everyone was using it and the regulators couldn't put it back in the box. I think the same thing is going to happen to crypto over the next two and a half years. That's a great point. I guess the only pushback there would be there's so a lot of you know traditional financial institutions are on board you mentioned BlackRock and others but you still have some of the big you know big banks. I think JP Morgan was one of them. A lot

5:14of regional banks that came out against this they were they were very against it. Can you kind of explain to the audience why they were so against this act passing? Yeah well look at your checking account or your savings account. Look at the interest that you're getting on those checking and savings account. That's why they were against it. The average checking account today plays one basis point that's 0.01% of interest. What the big banks were worried about was you had this new technology that could disrupt the status quo. Maybe stablecoins which are digital dollars issued on blockchains. Maybe they could pass interest and if I can pull out my phone and get 5% interest with the push of a button instead of 0.1% interest in my checking account well that's a little bit scary. So look they said they were worried about deposit flight, draining banks making it hard for them to lend. I don't buy it. I think they were worried about profit flight. They've had this sort of beautiful monopoly on people's money. Crypto is a challenge to that and so they were trying to make it difficult

6:15for that technology to win out. Ultimately new technologies win out. Ultimately what's easier, better, cheaper, more profitable for investors is what wins but for sure the banks were trying to push back against it and I guess in a sense they won but now they have to wrestle with the fact as I mentioned earlier that we have a pro crypto SEC. So we're going to gain a lot of ground anyway. Well I want to talk about the pro crypto SEC. They made some major headlines this week. They have a new exemption, the five year innovation exemption that will allow tokenized US stocks to trade on chain here in the US. Now that sounds like a lot of buzzwords there. Can you explain what this really does and like is this a big deal and how big of a deal is it? Yeah it's a massive deal. This is going to be the biggest change in how we've traded stocks in our lifetime. I think the place to start is just explaining how goofy the existing system is. Think about the world that you existed. You have driverless cars, you have Amazon will deliver anything to your door in an hour.

7:20When you go to trade a stock basically you can trade at 9.34 money to Friday not on holidays. If you sell a stock it takes one day to settle which means unless you have a very favorable brokerage meant you can't get your money out for 24 hours. 100 years ago guess how long it took a stock to settle. It took one day to settle. Yeah big no progress in 100 years. Okay so what's a tokenized stock? What you do with a tokenized stock is you take a normal stock and you put it in a custodian and then you issue a certificate on a blockchain that represents that stock right you could tokenized Nvidia tokenized Tesla. What changes a lot? Suddenly you can trade it 24, 7, 365. Suddenly it doesn't take nights or weekends off. Everyone around the world can trade it and if you sell it it settles not in a day but in a second. So if you have to like make a down payment for an apartment or buy a car and you need the money you can sell a stock and you have the cash

8:22instantly instead of waiting for that day. I think and the chair of the SEC thinks and the CEO of BlackRock thinks and the CEO of many other financial institutions think all stocks are going to be tokenized in the next five years and so we're going to be in 24, 7, 365 trading. We're going to be in global trading and this was the first time that the SEC put in place rules that would let Americans interact with these tokenized stocks. So I really think it was a signal moment. I think we'll look back at it is like there was the pre tokenization era and now there's the tokenized era and they're going to look completely different. It's pretty exciting. So it's essentially changing the plumbing of like how the markets work right and I think what made me feel a little bit better about this was like there's a tokenized stock will still represent like the same rights as just owning the normal stock because before I was like so what's the point of having a tokenized stock? Is it just for degenerators that want to buy and video at two o'clock in the morning but no it is faster settlement and there's like there's benefits to like the plumbing of like how it all

9:25works. That's exactly right. Yeah it's the same stock. That was the important thing in this innovation in this exemption that the SEC put in place. It's the same stock with the same dividends and the same voting rights and the same rules. It's the same thing. It's just as you said the plumbing. If you were trading stocks in like the 1980s they were trading on the floor of the New York stock exchange right like big burly linebacker guy is shouting and raising their hands. That was how it's stocks trade and then of course with the digital revolution they just started trading on computers and now all that happens on the floor of the exchange is people record videos and TV shows right. So that's an example of how the plumbing of trading can change. This is just the next iteration of that. This is a better faster global 24-7 iteration but as you said it's the same stocks. It's just 24-7 365 and it's instantaneous settlement instead of one-day settlement. It's underlying the plumbing. I think it's pretty exciting though like why shouldn't stocks exist in the internet age?

10:30Why are we still trading stocks effectively the same way we were in the 1930s? It seems completely ridiculous. The only pushback I'll have is someone who does this for a living now. I mean 24-7 stock trading. I kind of like the fact that I could just log off at like 6 p.m. and not have to worry too much but now it's now on 24-7. I feel you man I haven't slept in eight years. I guess that's the only downside is for people like us like now it's like well now I got to follow all the activity happening in the after hours because there is no more after hours it's 24-7. It's true. It does change a lot actually you know you think about something like earnings events. We have a day to think about what that earnings events mean. Sure you could trade after market hours but basically the market doesn't react during the earnings call. Now you're going to see the same amount of volume on every word that the CEO is saying. It does really change things so yeah I mean our nights and weekends are gone it's sad but you are going to have you won't have this sort of period of rest and recovery

11:31every day so it does change the dynamic of the market. I am curious to see how it's all going to interact. How are traditional stock or like the normal stocks going to interact with the tokenized versions. What if like there's a spike in volatility in the tokenized version the price starts deviating. Maybe that's all been worked out and it's not a problem but those are some of the questions that I have in the back of my mind. Oh I think that's a really good thing to raise and actually if you look at it today you know they generally track each other but it's not perfect. So over time you're going to get the Jane streets of the world and the large market makers and they're going to arbitrage between this and that but for the first period you should be buyer beware because you may be paying too much for this stock or maybe you're getting a discount for this stock. It's not going to work perfect nothing works perfectly out of the gate so there is going to be this gap risk and over time the arbitrageers will figure that out but you know they'll be a period where it really will be buyer beware so it's a good call out. Do you see this tokenized movement happening to other assets like are we going to be having tokenized real estate or we're

12:35going to have tokenized Pokemon cards I mean like is that just like what the trends are moving forward? Tokenized everything so if you go into the Dgen corners of crypto right if you're trading on offshore exchanges you're already trading pre IPO shares of Anthropic and OpenAI we're not waiting for the IPO we have digital representations of those shares that are trading at size in that market you can tokenize bonds you can tokenize commodities you can tokenize real estate you can tokenize Pokemon cards you could tokenize anything and that's what we see in the crypto world and the amazing thing about it for good or for bad is that they all trade in the same space even today if you take something like bonds and stocks it's not always easy to trade bonds in the same way you trade stocks right some of them you need to be able to call a broker literally with a phone it's like the 1990s in this tokenized world all of those assets will trade side by side you'll be able to margin

13:36one against the other and yeah it will extend beyond just stocks and bonds to private stocks to Pokemon cards it's going to be a weird financialized world I know there's some people who don't like that I agree that there are some risks in that but I do think it's something close to inevitable so I do think that's the world we're moving towards well it's gonna be a really interesting five-year period now that this is you know that not that the SEC has granted this exemption so really curious to see how this plays out I want to wrap up with just a big picture view on crypto it's been like a really weird year you know last October Bitcoin hitting all time highs 124,000, 125,000 then we kind of had a lull this year I mean Bitcoin was trading like in the $60,000 range then we got a jolt of energy in August like up 25% out of nowhere I think maybe there was some you know hype around the clarity at getting past where do you see this going now that like the clarity stuff is kind of behind us um we have interest rates going up the Fed just right raised the quarter point they're projecting

14:36to raise more yields are surging what I always think about is like what what era is Bitcoin in right now is it in the tech stock era where it acts as a tech stock or is it actually gonna start becoming digital gold where some people thought you know it's a hedge against inflation and you know it's part of the debatement trade so where do you see it all going yeah yeah the uncomfortable thing there is like my teenage son like is he an adult or is he okay uh he has aspects of both he'll do something totally insane and then he'll do some complicated calculus that I couldn't do so that's a little bit where Bitcoin is it's somewhere in the middle I think Bitcoin specifically will start looking more and more like gold I think people are more and more concerned about debatement and debt I think that's going to be a focus one of the reasons we rallied in August was because treasury secretary Scott Besson intervened in the long end of the yield curve and people took that as a sign that the government was going to put its foot on the treasury and monetary markets

15:37and it responded by spiking gold and spiking Bitcoin I think that's what we're going to see more broadly I'll tell you I feel very good about crypto right now for one specific reason my biggest tell on something that's in a bull market versus a bear market is how it reacts to bad news in a bear market you get like a little trickle of bad news there's like one gray cloud on the horizon and the price tanks and that's where we were for the first part of this year there'd be like some minor setback in crypto and we'd be down 5% it was brutal to live through yeah but you just mentioned this week we had the clarity act fail we had interest rates spike we have oil over a hundred we have multiple straights in the middle east being closed we have AI doomerism people talking about like extinction events crypto is rallying and when you see an asset that's rallying in the face of bad news that means there's a lot of good things going on underneath to force it to overcome

16:40things people are looking at these things like this tokenization trend and they're saying yeah interest rates make this challenging but this is such a bullish trend that we're going over it so when you're impervious to bad news which is where we are in crypto right now maybe we won't be next week you should monitor this yeah when you're impervious to bad news that's a really good sign that there's a lot of strength so I think it could be a very good end of the year for crypto that that makes that's a that makes me pretty excited you know what I what I worry about or what I think about is like where's like the excitement coming from because you know just rewind a couple years like there was excitement around a Bitcoin ETF and crypto ETF we got that there was a nice you know there was a nice build up to that then we had a crypto friendly administration coming there was excitement around that and and then there was you know hype around a potential clarity act and so like now I'm like where does it all where where does the excitement where does like the media attention come from now what is it going to be driving it because right now at least for this year all the excitement has been about AI and and the AI related stocks and that's kind of

17:42taken away some of like the excitement from just casual retail investors that's kind of how I consider myself in crypto there's a casual follower of crypto fragile investor in crypto so it's like where does the excitement come from what what are people going to get excited about so like my mom is asking about crypto and Thanksgiving you know yeah yeah yeah I hear you I think you're more pro than you're than you're letting on but I'll give you the casual retail investor there's going to be three things so this example of the SEC announcing this tokenization exemption that's just one of probably ten regulatory headlines they're going to hit between the end of this year you're going to have the SEC or the CFTC talk about perpetual futures which are futures that trade on crypto exchanges which could supplant traditional futures markets that will come out we're going to have a series of these regulatory announcements so just like the tokenization thing has us talking about how stocks could change we're going to have the same conversations around stable coins around futures around options around private companies I think you're going to get a series of those

18:43events the second thing I think you're going to see that maybe we'll penetrate the Thanksgiving table is a major M&A activity or announcements from big firms right so when you see something like mastercard buying a stablecoin firm for two billion dollars which is something that happened recently that's a sign that maybe there's something going on yesterday Patrick Collison of strike probably the most respected FinTech in the world made a post about the huge growth and stablecoin use from AI agents when you have people like that saying look there's something happening here I think that's a little bit of a jolt of energy and then the last thing is just price I know that this is a reflexive circular argument but when price does to go up people start talking about it I just mentioned that what I see in the market today is that the crypto native market doesn't care about bad news they think we're in this stablecoin tokenization super cycle if we start to see Bitcoin get back towards a hundred thousand dollars because of some of these catalysts then I

19:45think you know maybe you won't sound so crypto crazy to bring it up at Thanksgiving and maybe your mom your dad your uncle will be asking you about crypto toward the end of the year well I'm looking forward to it Matt this was fantastic I really appreciate you breaking it down for for me in the audience and do you have anything to plug no I mean that's it bitwise is a full service asset manager we'd love for you to come and go and look at it more than that come forward our content we produce a weekly memo on crypto I promise it's short it's 500 words you can find it at bitwise at bitwise as CIO memo and it gives you an institutional view of what's happening but mostly just appreciate the time this has been a lot of fun of course thank you again for your time and we'd love to have you back on thanks man how've it going well all right guys hope you enjoyed that conversation with Matt Hogan I thought this was a really interesting one I think Matt did a great job providing a balance yet optimistic view on where crypto is and where it's headed and I'm really curious to see how the rollout of tokenized stocks goes in the US and what kind of adoption it gets here by the

20:45way as we were recording that conversation on Friday morning Bitcoin started to rally and like mad said the fact that it's rallying even after the bad news this week could be a time that Bitcoin is starting to act as digital gold again let me know what you guys thought about this conversation is crypto is still a part of your portfolio are you more or less bullish now and how do you feel about the tokenization of stocks and potentially other assets drop your thoughts the comments on Spotify and YouTube and while you're at it consider giving us a five star rating as well you know all that engagement really does help us out and it helps other people find the show and if you're a new listener just a heads up we post every single day throughout the week breaking down what's happening in the market so definitely get subscribed if you haven't already especially with everything going on right now thank you guys again for listening watching and commenting shout out to Mike for all the work behind the scenes and we'll see you guys back here tomorrow from the day surrounded by noise

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