Morgan Krupetsky from Ava Labs Talks About Avalanche and Tokenization

According to Morgan Krupetsky from Ava Labs, tokenization has been around for some time, but this moment signifies its lasting presence.

Summary

Krupetsky notes that while tokenization isn’t new, Avalanche was an early adopter. Stablecoins exemplify the actual use case for tokenization, boasting a market cap exceeding $280 billion. Future advancements will center on the integration of DeFi into the ecosystem of digital assets.

Tokenization has become a significant narrative in the crypto realm, promising improved efficiency, liquidity, and access. However, despite increasing participation from major institutions, the landscape remains nuanced. In a conversation with Crypto.news, Krupetsky shared insights on Avalanche’s pioneering role in tokenization and the importance of distinguishing between hype and actual developments.

Crypto.news: In your article “Tokenization 101,” you mentioned that much of the discussion around tokenization is largely hype. What aspects do you view as exaggerated, and which do you consider legitimate?

Morgan Krupetsky: Tokenization has been explored since 2017, resulting in numerous headlines about tokenizing everything from uranium to iconic buildings like the Burj Khalifa. While there have been many announcements, many are merely preliminary announcements rather than functioning products. That’s why I focus on metrics, such as those from RWA.xyz, to gauge what is effectively deployed on-chain versus what is mere promotion. Stablecoins stand out as a success story, representing the quintessential tokenized asset with a market cap over $280 billion. This has sparked interest in tokenized money market funds, which, while still small, are on the rise. We also observe issuers of stablecoins and synthetic dollars branching into private credit, alongside ongoing experiments in tokenizing equities and collectibles. Nevertheless, distinguishing genuine projects from merely hype remains crucial.

Apart from stablecoins, which areas of tokenization seem the most promising to you? Where do the largest opportunities lie, especially concerning regulatory or technical challenges?

MK: I find the private credit sector particularly intriguing. A major reason is that these products can generate yield. Automating aspects like interest payments and distributions via stablecoins makes tokenization’s advantages feel quite tangible. For instance, private equity does not provide returns in the same manner, and its net asset value remains stable. While the benefits of being on-chain exist, they are less apparent. Conversely, credit products quickly illustrate the added value of programmability. In asset-backed finance (ABF), we leverage stablecoins and programmatic mechanisms to enhance efficiency. Post-global financial crisis, banks reduced certain lending activities, allowing fintech firms to fill the gap, yet the ABF landscape is currently dominated by large alternative asset managers with extensive operational teams. By utilizing programmable mechanisms and stablecoins, we can enhance these processes. This evolution invites smaller funds, emerging managers, and family offices into ABF lending, a sector expected to expand significantly in upcoming years. We are currently managing a few pilot projects with fintech originators, aiming for scalability. Our goal is not just to upgrade the ABF sector with better technology but to implement superior, programmable financial solutions. It’s important to note that our intent is not merely to tokenize loans for the sake of creating secondary markets. Many initiatives aim for liquidity this way, but real impact stems from deploying the underlying technology to refine existing workflows.

Regarding automating lending decisions, some companies, like Carvana and Zillow, have attempted this before with varying success. What’s your take?

MK: I don’t believe the goal is to replace human judgment. Instead, it’s about providing institutions and individuals with enhanced tools. This aligns with the current use of AI, which aims not to replace expertise but to assist people in making informed choices. Blockchain facilitates quicker standardization and verification of data, allowing for faster decisions grounded in up-to-date information rather than outdated spreadsheets. In this framework, technology serves as a facilitator rather than a substitute for underwriting skills. Human judgment remains essential. Similarly, the misconception with tokenization is that simply creating a token doesn’t ensure market demand or liquidity. Tokenization provides the infrastructure for those markets to emerge, but only if genuine demand exists.

You referenced the financial crisis and lessons learned from subprime mortgages. Some industry experts caution that tokenization carries risks, especially when asset managers lack transparency about their packaged offerings. Do tokenized asset issuers truly utilize blockchain’s potential for transparency and compliance?

MK: Just as tokenization can’t assure liquidity or market demand, it also doesn’t inherently guarantee compliance. Technology acts as a tool. It can embody laws and regulations and facilitate proactive compliance management, but the governance framework must originate from regulators and financial entities. In our work with private credit, for instance, blockchain enhances risk-adjusted returns for us and our capital partners. The technology allows for greater transparency and programmability, helping fintech originators manage compliance and risk more effectively. Increased visibility, from an investor’s viewpoint, fosters confidence in capital deployment. Ultimately, it’s the issuer’s responsibility to ensure their tokens or funds adhere to compliance standards, considering the underlying assets and regulatory environments. Different markets employ diverse methodologies. While technology assists, it doesn’t replace the necessity for human oversight in compliance.

What are your thoughts on the U.S. regulatory landscape regarding tokenized assets?

MK: Overall, the regulatory landscape has evolved significantly post-election. This shift has created favorable conditions for the industry. Institutions, banks, and asset managers are now more receptive to exploring public blockchain technology, evident in the changing conversations. Regarding the comparison between tokenized assets and their traditional counterparts, the benefits truly manifest when more of the asset lifecycle is managed directly on-chain. Attempting to tokenize assets issued off-chain and managing them across different systems introduces friction. I expect an increase in native on-chain issuance, although we remain in a transitional phase. The long-term goal is to see stablecoins used in everyday transactions, with assets being tokenized from the outset and management conducted entirely on-chain. That’s when the advantages of composability and programmability become fully realized. For instance, idle assets could accrue interest while held in escrow. Yet, we aren’t at that point yet. I also empathize with long-established institutions, like banks. Many have century-long histories. Revamping systems can be costly and disruptive, necessitating a clear business incentive or threat to operational revenue before they undertake significant changes. Meanwhile, neobanks and fintechs can pivot more rapidly for experimentation.

With established firms like Nasdaq filing for tokenized equities and Mastercard application for stablecoins, do you believe DeFi can rival traditional players in these sectors? What benefits does decentralization offer?

MK: There will likely always be a role for public, permissionless DeFi as it currently stands. However, the trend indicates a convergence of DeFi, CeFi, and tokenization. When I joined Ava Labs three years ago, these were considered distinct realms. Now, they are merging, and I anticipate this trend will persist. Institutions may not jump directly into DeFi platforms, but DeFi technologies can empower the backend of fintech firms, neobanks, and traditional institutions. This is already evident with exchanges that have initiated earn programs reliant on DeFi technologies operating in the background. From a tokenization standpoint, the most promising route to adoption involves integrating with existing platforms people are familiar with—be it Nasdaq, a wealth management platform like Robinhood, or private banking systems. For users, the blockchain aspect should remain seamless; they shouldn’t need to discern which blockchain underpins the service. What matters is access to better financial products. For example, envision spending directly from a tokenized money market fund using a debit card. This kind of user experience will catalyze widespread acceptance, all while being driven by Web3 infrastructure, including DeFi.

Can you summarize Ava Labs’ initiatives within this arena?

MK: Our mission has always been to digitize and tokenize the world’s assets. Many at Ava Labs were working on tokenization even before it was termed “RWAs.” We consistently recognized its potential as a key blockchain application. One of our early achievements was collaborating with Securitize and KKR to tokenize part of their healthcare growth fund in 2021, well before tokenization became a hot topic. This demonstrated the potential for incorporating high-quality assets on-chain. Since then, we’ve focused on two primary objectives: first, securing a high-quality array of tokenized assets from leading managers like Apollo, BlackRock, and Wellington; second, expanding distribution and demand through Avalanche-based platforms. We’re actively reaching out to potential distribution partners to ensure tokenized assets can be accessed via established channels. Presently, most liquidity resides off-chain. The journey towards adoption hinges on connecting this liquidity with tokenized assets through traditional distribution methods. This will ultimately facilitate a substantial increase in adoption.

What can you share about the Avalanche treasury initiative?

MK: I view it as a pathway for a broader array of investors to engage with the Avalanche ecosystem. Not everyone is comfortable directly holding tokens or setting up a Web3 wallet, and frankly, the industry still has room for improvement in terms of user friendliness. Products of this nature resemble ETFs or ETPs, offering a more familiar framework for investors. This includes both institutions and individuals seeking exposure but preferring a traditional structure. Ultimately, it democratizes access to Avalanche for those who might otherwise remain uninvolved.

What further actions are needed to achieve that vision?

MK: Our focus from the outset has been on institutions and on-chain finance, and that remains our primary objective. We are intensifying our efforts in areas like DeFi, payments, treasury tokenization, and wholesale finance. While I’m proud of our advancements, we still have significant work ahead. The truth is, mass adoption has not yet been achieved. Institutional liquidity isn’t entering on-chain assets in substantial volumes. Many elements are in place now—custodians, on- and off-ramps, compliance frameworks, tokenization platforms—but we have yet to reach a point where the industry can confidently declare, “We have arrived.” I liken it to the early days of the internet. Back then, people spoke of “internet companies.” Today, every business utilizes the internet, and that distinction is moot. We’ll reach a similar point when blockchain is an integral part of operations across enterprises, governments, and financial institutions; at that juncture, “blockchain companies” will simply be a part of the infrastructure.