McKinsey’s View of Crypto

My chat with McKinsey’s global head of crypto, Matt Higginson, and his colleagues - and what the world’s leading consultancy is paying attention to

Ric Edelman: It's Friday, July 28th. Coming up on the show today, the world's leading consulting firm, McKinsey and Company, and their views on crypto. One of the most important tools in war: camouflage. It's no longer enough to merely hide from human eyes, though. Thanks to technology, thermal sensors now cost only $1,000. They can detect a vehicle five miles away. New camouflage, therefore, tricks those electronic sensors. Multispectral camouflaging: it reduces radar reflections and heat signals. It fools not only soldiers, but thermal scanners by reflecting cooler wavelengths that are emitted by the ground. Multispectral camouflage nets can work in snowfields, deserts, urban areas, and in woodlands. They can hide soldiers as well as tanks. There are also appearance modulation systems that use cameras to alter their own temperatures to match that of nearby objects. And then there are adjustable visual camouflage. These are battery powered sniper suits that have 500 LED lights embedded in the fabric. A helmet camera causes a light sensor to change the color and the luminosity of the LEDs to match the soldier's surroundings. They call this a Harry Potter Cloak. And there's a company in British Columbia that's making camouflage coloration patterns that make objects appear invisible. Camouflage is not only big business in tech for the military, detecting those that are camouflaged is also a big deal. Hyperspectral sensors use sophisticated data processing to determine not just an object's shape, but its composition. Am I looking at something that's foliage, fabric, metal? The technology even detects anti-tank mines that have been buried. 

Ric: All of this is meant to make one side more likely to win a war. Can you hide yourself from your enemy? Can you detect an enemy that is trying to hide? You know, if all this sounds a little bit creepy because we're getting good, we're getting better at war-making, keep in mind that much of the tech that we use in our civilian lives began as tools for the military. So you can expect a lot of these products to find their way into commercial applications in years to come. Coming up next on The Truth About Your Future, my conversation with Matthew Higginson, a partner at McKinsey and Company and his colleagues. Stay with us right here for The Truth About Your Future. 

Ric: You're listening to The Truth About Your Future podcast. Last month I hosted the fifth annual VISION Conference in Austin, presented by my company DACFP, the Digital Assets Council of Financial Professionals. VISION is the longest running digital assets investment conference that's specifically for financial advisors and accredited investors. And at this year's conference, it was our biggest ever, attended by more than 125 financial advisors and investment professionals from all over the country. One of our sessions featured Matt Higginson and his colleagues of McKinsey. I wanted to share that entire conversation with you today. Here it is, unabridged and uncensored. 

Ric: I'm very happy to welcome on to this panel a very prestigious group of gentlemen from McKinsey and Company. We all know McKinsey, one of the most well-known and prestigious consulting and research firms across so many industries. We have Matt Higginson, who's a partner with McKinsey, Julian Sevillano, who is also a partner, and Matthieu de Vergnes (you know, I'm an American, not French), who's an associate partner. Gentlemen, thank you so much for joining us. You're going to find this really fascinating info as we talk about the whole point of commercial application of crypto. So many times I encounter people who say, what's it good for? It doesn't do anything. What do we need it for? Well, these three gentlemen are going to answer that question, and you'll have an opportunity to ask your questions as well, so get them ready. Matt, let me begin with you. I mean, it's obvious. I mean, everybody knows McKinsey, the biggest companies in the world, are your clients. What are you hearing from them? What's the appetite for adopting blockchain solutions and digital assets into their businesses? 

Matthew Higginson: Yeah, Ric Thanks for asking. And first of all, thanks also for having us here. It's a great gathering, and our history goes back a long time. I forget how many, how many decades. But look, before we sort of get into what directly are we hearing -- the appetite -- maybe it's helpful just to make sure we frame this in terms of the sort of applications and things that we are talking to clients about because it can be a pretty diverse range. I think about global networks: networks that support things like trade finance. Trade finance was one of the big promises for blockchain a few years ago. I think about the use of blockchain for things like authentication and supply chains, and how do we track and trace goods and prove that. I think about applications in tokenization. We heard Roger talk about this tokenizing financial instruments, and how do we see efficiencies from that. I think about applications in currency. How do you do instant settlement, instant long distance cross-border payments, and of course, crypto. And I think when we listen to the appetite from our clients, there's been a real bifurcation during the crypto winter. And what I mean by that is there were folks who are quite a long way down the path of building out real world use cases, already applying them, running pilots, building out ecosystems. And those folks are running hard. Frankly, many of them are continuing. So when you look in things like the the fashion industry for luxury goods using track and trace: that's continuing When we look at supply chain and compliance applications and things like automobile, that's continuing. But there's a different population who are saying, actually, I wasn't quite sure how this applied to my industry, and so we're not quite ready to invest anything more right now. And I think particularly a lot of our clients are very cost conscious when we look at the business model behind some of these applications, it's maybe not so clear yet. And so one of the earliest things that gets cut is this kind of additional spending on innovation. And so there's definitely been that separation. I think we'll get more into this, but there's a middle use case which is in financial services where frankly, several of our clients have said, you know what, we feel our position in the industry could be threatened by this technology. We heard earlier on about trade and post trade. We probably need to build some defensive moats here and grab the middle ground and start to build out the infrastructure. That's a little bit about what we're hearing. I think my final point just to start with is that those clients who believe in the future of the technology are saying talent is cheap right now. The assets are cheap right now. The ability to build the technology is cheap right now. So I'm going to push hard at the moment in anticipation of this industry kind of resuming its climb, I know, in 12 months time. So there's been this very clear separation. 

Ric: So does that mean that much of this is still in the lab and hasn't yet gotten into the marketplace? 

Matt: Look, I think there are definitely examples where this is in the wild today, and maybe I'll touch on a few of those. There have also been some pretty spectacular failures where we've seen, you know, enterprises essentially go insolvent. I think those where we've seen real success -- let me just list out a few more and go deeper -- but one would be things like tokenization of cash. Look at the business model of Stablecoins out there. We have $130 billion circulating, maybe trading up to 100 billion a day. That feels like it's starting to get some traction. I think we've seen tokenizing real world assets. I think that's out of the lab. We're now in the wild with things like the money market fund we heard about or bonds or other funds. I think there are probably examples in payments where you could say, technology is really being used. You know, the cross-border payment solution, the closed loop solutions. And those examples I mentioned in like the the high value luxury goods industry and in things like automobile and manufacturing. In the wild real world use cases that I don't think you could say are still in the lab. But there have definitely been some challenges. One of the most spectacular is global trade finance. Trade finance, which is riddled with paper and faxes and manual processes -- all of a sudden this technology was promising to digitize the whole thing and make us a global economy running efficiently, real time. And I think there have just been a string of examples this year, whether it's WeTrade or Marco Polo or Trade Lens or others where unfortunately the banks saw the benefits of this, but the corporate world didn't see the business case to invest and use it. And we'll get into the whys later on. 

Ric: And so I'd like to have you do that. I'm going to turn this over to Matt, and so he can bring his colleagues, Julian and Matthieu, into this conversation to talk about exactly that: the growing demand areas and how tokenization is really permeating the financial ecosystem. 

Matt: Yeah, so I'll frame it up. Matthieu, I’ll pass it to you first. I think in financial services we're starting to see these green shoots of saying tokenized assets on a blockchain are a better mousetrap than what we have because of a number of different things. So maybe with that, I'll tee you up to explain what that looks like, what we're seeing tokenized, and what some of the benefits may be. 

Matthieu de Vergnes: Yeah, I think what's been really interesting, relating to what you were saying earlier, Matt, in the last 2-3 years is: 2 or 3 years ago we were in a growth environment. We were at a crypto high, and a lot of our clients were setting up teams to think through what's the impact and opportunities, and to a certain extent, the threats that blockchain can create. Now fast forward two years and come to today. We're in a bit of a tighter environment, we're in a bit of a lower crypto cycle, and our clients are saying, so what value can we actually really drive and generate from a revenue standpoint and cost standpoint from a blockchain technology? And the examples we're seeing are all tied really to the technology itself that is 24/7, that it has atomic settlement or near instantaneous settlement, as we touched on earlier, and programmability. And some of the benefits that we see are really tied to specific use cases or asset classes. Today, we talked about capital efficiency earlier, and the fact that because we can settle much faster, within a few minutes or milliseconds, we can prevent some of the lost capital before, in particular, in an environment today where interests are high. Well, one use case that I think is out of the lab is triparty repos today there's about $70 billion of daily tokenized trades of triparty repos on blockchain. 

Matthieu: Another example -- if we think of other benefits of the operational efficiencies that we discussed earlier -- obviously on money market funds, but there's other asset classes. We look at corporate bonds, for instance, where there is significant servicing of the asset throughout the life cycle. We hear from our clients that not only are there costs from a manual standpoint, but there's costs also in terms of penalties or fines when you miss, say, a coupon payment or you have an inaccurate coupon payment. If you're able to embed this into the smart contract, you eliminate a lot of those fees. And we've seen that with early issuances. Siemens issued a 60 million corporate bond. We talked about enhanced transparency. And in compliance, I'll just mention one great example of that is carbon credits. It's a new asset class that has significant validation and verification requirements throughout the life cycle and up until retirement. Being able to have this on chain and to be able to track the asset and make sure that there's no double counting, which gives a significant risk when it comes to carbon credits, can be significantly simplified or effectively automated on the on the token if you have it on chain. 

Matthieu: The last point I'll touch on, which is in my mind extremely exciting about tokenization, is democratization of access. You've probably heard of fractionalization, but all the benefits that it creates in terms of savings effectively allow to lower the entry ticket. And I think it's very interesting for this audience, but into asset classes that today require 10 or 20 million minimum entry tickets. One example is private equity: the ability to move onto the smart contract. A lot of the tasks that are done manually today means that you can lower that entry point and the asset owners or the issuers, the private equity funds, for instance, can access a whole new set of capital that don't access today, whether it's high net worth or even in the longer term, potentially retail. And those investors can access a set of assets that they don't or are unable to access today. And again, we've seen, I think, more than pilots today. We've seen large names, KKR, Hamilton Lane, Apollo also announcing that they will move to this. So there's significant real use cases and exciting use cases we see in the financial ecosystem. 

Matt: So maybe just to put some scale around some of these applications. So I think we're all familiar that the crypto market cap has stayed just north of 1 trillion. If you look at the tokenization of these other assets, maybe cash is at 130 billion, something like that. But many of the others are in the low tens of billions tops, right? Whether it's we're talking about things like a crypto fund or whether it's things like the private equity examples, they're small. And I think if you compare that with the total addressable assets of hundreds of trillions today, it's a tiny fraction. So the question we've got then is like, you know, what's going to happen? Where are we in this classic S-curve that we've seen describe many innovations in the past? Are we nearly done with crypto? Are we through the cycle and now we're just kind of petering out? Are we partway through maybe with cash, we're just starting to see tokenization of cash. Are we right at the very beginning with things like tokenized bonds and funds? And so when you think about the trajectory of this and where the industry is going and should you be paying attention and investing, I think the inevitable answer is we are very early in many of the asset classes. We are a fraction of 1% that’s gotten tokenized with a way to go forwards. Julian, I want to come to you to talk about the how and the why then. Because if we are truly at sort of day one of this S-curve with many of these new asset classes, like what's it going to take and what are some of the challenges? 

Julian Sevillano: So I mean, I think part of it is just a nascent industry. And I think if you start not in the obvious, we'll talk about the R-word at the end, but if we talk about just how the technology is evolving, like many of our conversations with our clients are really about the art of the possible, because they're just beginning to learn how the technology can help them and how the technology can drive either efficiency or new opportunities in the financial space. And we're going to talk later also about non-financial applications. The industry itself is solving for its inherent challenges that it has. Right? There are lots of challenges that they have on scaling. There's many different blockchains that have different strengths and weaknesses, and they have to solve for those in order to help more efficiently solve different issues. So I think that's a key issue. There are UI and UX problems. So user interface, and this is not an easy technology to use necessarily, it's getting easier. But for consumer facing solutions, for example, there's, you know, most of these things are still quite cumbersome and quite challenging. And then there's always a privacy and transparency kind of conundrum which bleeds a little bit into the regulatory requirements, but it doesn't just bleed into the regulatory requirements on knowing your customer and things like that. It also really bleeds into the utility that you're trying to drive out of a solution versus how much you want the world to know about what you're doing and about your business as well. And then if we get to the regulatory piece, this is always saved the best for last. You know, obviously in the US, we're dealing with a lot of regulatory uncertainty and a lot of curveballs. And outside the US, in some cases there's a little bit more regulatory certainty. But if we think about capital markets, for example, there's just a tremendous amount of a lack of coordination and completely different types of regimes and requirements. So if you're trying to issue assets that can be available on a global scale, it's incredibly difficult to do if not impossible. In fact, it is impossible to do at this point in time. So there's a lot that needs to happen in order to be able to enable greater and more mass adoption. 

Matt: Yeah. Maybe to pick up on this theme about the out of the lab and into the real world, I was encouraged by what Roger was saying earlier on about the fact that these are real assets that you can purchase, invest in, trade in, and use as collateral. That is the significant shift, I think, of the last year or so. This shift away from, we can do a private experiment below the radar. Frankly, it's internal to whatever organization to go to a point where we can start to see these assets being available. And my sense so far is that if we can begin to quantify the benefits, whether that's on the cost side or the potential revenue side, then that will begin to enhance and accelerate this adoption path right up the scope. Maybe just coming back to this piece on regulation, Julian, I think a lot of folks in the audience are probably nervous about the status of tokenized assets and clearly nervous to invest significantly in something where there's a lack of clarity. Comment on maybe where we are with regulation as opposed to predicting the future. What's your sense? 

Julian: Sure. I mean, so if you go back to -- traditionally a regulator’s mandate has been, similar to what Roger said in the prior panel, if it quacks like a duck and it acts like a duck, it's a duck. From a regulatory perspective, what a regulator would always say is, you know, same activity, same risks, same rules. Right? And the challenge with that is this is a different technology. That doesn't suggest that the rules should not apply, but they might need to look slightly different. Right? And I think that that's where there is a lack of clarity in the industry right now with regards to how do we actually comply with the requirements for issuing different types of securities, either as digital natives and/or as a twin on a blockchain. How do we comply with disclosure requirements? How do we comply with consumer protection or investor protection requirements? How do we comply with AML KYC Requirements? That guidance has not been given, and it's not been given in a consistent way. Compound that in the US with the fact that you have kind of a multitude of different regulators at the state and federal level. You've got banking regulators at the federal level that supervise a limited amount of digital asset custodians. At the state level, you have a patchwork of digital asset custodians that are registered in 40 some odd states, with a couple of states that actually issue trust and or bank licenses for these types of entities. And the underlying supervision of those activities, these firms that actually safeguard these digital assets, is frankly quite weak, with a couple of exceptions. Right? That doesn't bode well for you having confidence as a fiduciary in where you're parking your customers’ assets or the underlying private keys. That's just a fundamental problem. And it's a challenge that no regulator has come forward to do yet. At the federal level, under the prior administration, they tried to do that in the OCC and then that kind of changed. And now you have a very bifurcated approach between The Fed and the FDIC and the OCC, never mind the capital markets and debt markets regulators, where you have the CFTC and the SEC, which are basically, I think, at this point, the SEC in particular, really, you know, everybody seems to believe that basically their supervision is by enforcement. Right? And so there's a lot of uncertainty, and it's very difficult to build on that uncertainty. And there are court cases that will take a while to kind of play themselves out before some of this uncertainty is clarified. And, you know, that leads to what we see in the headlines as many firms actually looking for opportunities abroad, where there might be some other regimes; in Europe they just passed the Markets in Crypto Assets, the MiCA Regime, which does provide a very clear path for licensing, a very clear path for permissibility. What can firms do and what can't they do? And it provides some guidance on how they need to comply with certain requirements. In the Middle East, there are similar guidance in Singapore and Hong Kong. There are other regimes that have similar guidance, and I think that's what's needed is a more coordinated approach from a regulatory perspective in the US. 

Matt: So maybe let's put a more of a positive spin a little bit on this, which is I think in addition to this evolution along an S-curve, as these assets begin to evolve and potentially grow in terms of demand, I think the regulatory environment, all we can say is that it is likely to become clearer, right? We are going through a transitionary environment. 

Ric: Over what period of time is that going to occur? 

Julian: That's hard to speculate. Yeah, well, I think in many ways...  

Ric: No, no. Speculate. That's why you're on stage. 

Julian: Yeah. Well, I would say in many ways I think demand will dictate, will speed it up. Right? If there is more demand in the market for these types of assets, it will push the regulators to move forward and demand in the US and demand abroad as well. 

Ric: So Congress is trying to create that urgency. We've got the new bill put out last a couple of weeks. What do you see? We heard from Lee earlier today from the Texas Blockchain Council, who is not optimistic that that bill will pass this year. What's your viewpoint? 

Julian: What we've heard in the industry is that we don't think any significant crypto regulation will pass because it's not a priority within the year that we have right now. Right? We're in an election cycle. The other challenge with that bill is that it's still only, it doesn't have Democratic sponsorship yet. That doesn't mean that it won't. It doesn't look that dissimilar from the Lummis-Gillibrand bill, which did have bipartisan support. Both of those bills provide very fundamental building blocks. Right? Just like there's a lot of geeky stuff in there that doesn't get the headlines, that is incredibly important, like defining what a qualified custodian is. That's really important for digital assets. Defining what good control location looks like. That's just a fundamental thing that as custodians, you need to know, and as fiduciaries, you need to know what that definition. 

Ric: So if that doesn't pass this year, I don't see anything happening until after the election. Do you agree? 

Matt: I think that's broadly what we're hearing, which is certainly not much optimism to try and do it before the end of next year. 

Ric: Which means that the election will be pivotal for the future of crypto because the two parties have very different views. Do you agree with that? 

Julian: You know, what I struggle with is, I don't know that that will always be the case, right? I think that there's a kind of an oppositional, I believe this, so the other party has to believe that. And that can change because if you think about some of the underlying benefits, both parties should be believing in those, in the underlying benefits. 

Ric: The politicalization of crypto is a relatively new phenomenon and it is all the rage at the moment. There was a period over the last decade where there was a lot of bipartisan support for this. I think FTX had a pretty big adverse impact and has changed the tone in a lot of ways. There's also a new level of debate about CBDCs and the issue of government control and privacy. So what's it going to take to unwind all that? 

Matt: One distinction, though, which is, the regulation around protecting consumers investing in crypto is quite different, I think, than how we're going to see this evolve with all the other digital assets that we've already touched on. When you look at tokenization of bonds and funds and mutual funds and money market funds, this sort of tokenization of assets I think should be set aside from the crypto piece. I think there is real intent to protect the unwitting consumer on crypto and crypto related activity, which hopefully gets separated from actually what I think is a very powerful use case that will over time change our industry, which hopefully comes under a more sensible regulatory regime. 

Ric: But if that's true, we need to separate the two. What does that mean for action steps for this audience and for investment advisers around the country? Does that mean we sit on the sidelines till this gets figured out, or do we engage? And if so, how? 

Julian: I think what you start to see is that it actually there's, and you've already seen it over the last several years, the industry, the digital asset industry itself has been raising the bar themselves. Even if they haven't been explicitly told to do so. Implicitly, if they want to engage with traditional financial institutions, they know they need to build stronger infrastructure. They know they need to have stronger controls. They're no longer tiny little workshops, right? They've got 1,000-person teams. They've got 150 people in compliance. They're building solutions to what they think would be industry grade. Right? That, I think is a phenomenon that you begin to see. And maybe you start thinking about what sort of infrastructure will support kind of institutional grade digital asset solutions that then that then can support this industry. 

Matthieu: And maybe the one thing I'd add is if we come back to the S-curve question, one of the pieces that is still missing in development is just at scale distribution of these assets. And I'm referring to the second category Matt was alluding to is, for example, tokenized private equity fund or tokenized real assets being able to access those investors who would benefit from this fractionalization. But it's a different type of investors that today don't invest directly in private equity. And building that distribution capability to unlock that capital today is still not fully developed. There's no at-scale distributor that's providing that, and that will be, I think, a critical unlock to create the revenue upside from the tokenization. 

Matt: Maybe just build on, I’ll come back to you on this question around what are the other indicators across the industry that actually, you know, applications of blockchain, particularly tokenization, are gaining hold? And Matthieu, I want to come back to you just on this question of what are we seeing in terms of things like custody and analytics and KYC, because those would be the right building blocks, right? There would be the enabler for the industry? 

Matthieu: Yeah. I think what we're hearing in terms of enabler is there is niche providers, there's some digital native providers that will offer some KYC. There are some digital native providers that will provide some of the issuance or tokenization part. There is no established institutional grade one-stop-shop that will provide that solution, and that's a bit lacking to provide the credibility to issuers who are looking to issue those assets or institutional investors who are looking to invest. And so our clients are looking to develop and build that infrastructure, whether it's via partnerships or whether it's in-house to Matt’s point earlier. There's talent, there's cheap technologies, there's ability to do it in-house, but it's not yet fully developed. And that will be a critical enabler is having that institutional grade almost one-stop-shop across these different services to fully scale the technology. 

Matt: And I think this comes back to your question, Ric, which is what can we all expect? What can we do in the industry? I think it is to raise the bar on that expectation of what services are available to investors. Where can I have institutional grade custody solutions so I know my assets are being held safely? Where can I see institutional grade trading and post-trade services? Who's doing compliant KYC? Who's doing the on-chain analytics that will help me understand where and how to invest. That chain exists in pieces today. But I think we're going to start to see even some of the existing incumbents moving more and more into that space to be that one-stop-shop. And that again, would be the signifier of this is an industry that's starting to mature. 

Ric: You mentioned that there were some promising elements, areas of opportunity, but there have also been, you also said, some spectacular failures. One that comes to mind is Australia and their efforts to move their financial markets into using blockchain tech. They spent a lot of money, spent a lot of time. They were one of the first stock exchanges to try to do this, and they abandoned it after a while. Talk about the Australian experience, lessons learned. What are the implications of what happened? 

Matt: Yeah, so maybe I'll start and give some thoughts on that and feel free to jump in. I mean, for those less familiar with this, so this was the Australian Stock Exchange, that very early on decided that they would replace their existing chess system with what was basically a blockchain based issuing trade settlement solution, end-to-end, and went with digital assets at the time were very much the leading thinkers, the technology providers in this space. And I think way back in, I'm going to guess ‘16, something like that, pretty early on, we're like, okay, I see the future, right? Theoretically, this stuff makes sense. We should be able to do real time settlement. There should be the transparency, the auditability, this should be automated, all the benefits that we've heard over the years. I think it's a great example where all of those things felt and sounded right. But we were very early in the development of the technology. When you think about the number of new blockchain protocols have evolved since, the evolution of smart contracts, the utility of blockchain that's evolved over now seven years is so dramatic that you look back and go, yeah, right idea, but a real challenging technological problem to solve. I think though, that misses the point. Which is at the end of the day, most of the blockchain applications that are gaining traction are doing so in a way that all of the participants receive benefit. So when we talk about things like the automobile industry, where we're solving problems about audit and compliance, where the suppliers, the manufacturers, the auditors, the regulators all get some benefit. In the case of the ASX, it wasn't apparent, I don't think early on that that benefit would flow back to the whole of the industry. And I'm not close enough to see exactly the mechanics of what's happened since. But I think when we look at use cases today, we have to ask that question: Do all the participants in the application actually see revenue and value flowing back to them? 

Ric: So they were simply too early and they were simply too short sighted in the development of the project. 

Matt: I don't want to sound critical of the project, but I think your words are right, which is, I think, too early, maybe a little short sighted. Also not appreciating the investment it's going to take for everybody to adopt into that system. 

Ric: So are we not going to see this by others or are they, what's the lesson learned? Those are the errors made. We can see those. But what does that mean for further development? 

Matt: Well, look, I think there is evidence already in market. There are digital asset exchanges that now exist and many of them are really now focusing their attention on the institutional investor. And so maybe it is just a timing thing and think about the right construct so that the right investors are coming in the right buy-side, sell-side participants are involved, and there is real financial benefit flowing back to the participants. It's sort of a different construct to get there. Yeah. 

Matthieu: The one thing I'd add is I think now that there's a clear lens of as you think of digitizing or tokenizing an asset class, what is the true benefit from both from a supply and demand side? So I mentioned the private equity case where it's pretty clear if you look at sort of equities, there's a bit more of an open debate of like we can pretty much trade equities almost 24/7 today. Is there really a need to tokenize equities? So there's an asset class by asset class, I think now there needs to be a real question of what are the benefits for this specific asset class of tokenizing? And the second thing I'd say is I think the industry views that we won't necessarily move immediately from traditional rails to digital rails. There's likely going to be a progressive shift, what we call the digital twin model, where you may have in parallel your traditional custody. If I think of, again, the private equity example, the custody of the actual certificate, and then there is a tokenized version of that certificate on-chain and you have the custody of that digital version of the certificate. And building an ecosystem that allows for that progressive transition because you then bring all the existing value chain participants on board and you create that alignment is likely to be critical for something that can also meet regulatory requirements and the general appetite. 

Julian: I'm building on your point. You know, today there's any number of between five and 10 intermediaries required to take an asset from digitizing it to actually trading it and delivering post-trade services. Right? And anyone and every single one of those intermediaries that underlie that activity right now, they're all still fairly immature and nascent. In the traditional world and the traditional financial services world, every single one of them are considered financial market infrastructure. Right? They have to abide by the highest standards of controls. They just simply can't do that right now. They're just they just don't have the scale to do it. They don't have the knowledge to do it. They don't have the ability to do it. That will happen over time. 

Ric: So we're discovering this past couple of years have been really interesting that it has really helped us focus on a fundamental element in the world of crypto. There are two pieces to this. One are the coins themselves, and you look at Bitcoin, look at Ethereum down 70% in value, bouncing back significantly so far this year. And they've done that repeatedly throughout their histories. Separate from the coins and the tokens themselves are the crypto companies, the companies that are developing these tech, these technologies, the companies that are the crypto exchanges and the crypto custodians and the various platforms, cold wallet providers, and the list goes on and on and on. And we saw in 2022, in particular, a bunch of these companies flat out go away: Blockfi and Celsius and Three Arrows. And we all know the list of companies that have done this. It raises the basic question because this is a fundamental concern of advisors from the investment thesis perspective, should I buy Bitcoin or should I buy a Bitcoin miner? Should I invest in coins or should I invest in companies? For example, there is a crypto SMA which invests directly in the coins and tokens through an SMA structure. We talked about Chris King earlier. You'll meet him at this conference. He's in the exhibit hall. And then there are crypto ETFs offered by Global X and Invesco, who are also here in the exhibit hall. Which is the approach? I mean, you could argue that the company fortunes may fail all the way to worthlessness and bankruptcy, et cetera. But the coins survive. So which from an investment thesis perspective, from an investment strategy, which is the proper path for advisors? Should we be going the coin route or the company route? 

Matt: Maybe I'll start again. You can jump in. I would separate out, what's your goal here? Right? I think there is an ease of which today, even as an institutional investor, you can directly purchase coins and you can do self-custody, right? We can actually all send them to a little cold wallet, USB stick version, stick it in your safe, lock it away like we can as individual investors. But I get the sense that's not what investors necessarily want. And in fact, we're seeing more and more demand to get return on those investments. In which case can I buy something that's not coin that gives me exposure to coin, that allows me to earn some yield on that investment, allows me to collateralize and use it for something else? And so I think there is this growing demand for whether it's a basket of a fund with a basket of coins, maybe it's thematic funds, maybe it's very specialized, actively managed funds actually, that give me access to cutting edge technologies in this space. As an example, we're hearing demand for, can I get access to a fund that actively invests in DeFi or in metaverse or something else like that where I don't have time to invest, but I want to get exposure to that myself. And so I think there's two different outcomes here. One is I just want to buy and hold, in which case that's been the same case for a dozen years. And you can go do that and you can go buy and send it to your cold storage. Or you can now go down this route with ETFs or potentially revenue and earning yield on those. And I'm seeing and hearing more and more demand from that. And I think we're just starting to figure out what are the right structures to put together to offer that in a grown-up way. 

Julian: And I think you have maybe two different types of rubrics for how you do due diligence on coins versus how you do due diligence on companies that are in the digital assets or blockchain space. Right? On coins, you really you need to understand the underlying projects. You need to understand the actual rights and or benefits that that coin might be able to provide the holder or not. You need to understand the legal structure under which it's been issued. You need to understand how it may or may not be complying with certain rules or laws. All of those things. There are a lot of things you need to understand how much liquidity there is, who's holding it, all of those things. There's a lot of other structures to think about that. It's a slightly, it's a different way of thinking. And if you think about, for example, underlining a Bitcoin miner, you know, this is where a lot of the lenders ended up in trouble because they thought about lending to Bitcoin miners as if they were lending to doing equipment financing. Right? I'm just going to finance against ASICs. Well, that's great. But when Bitcoin is at 50,000 and ASIC is worth X, when it's at 20,000 and ASIC is worth X minus, whatever it's worth, right? So they underwrote the equipment and not the actual industry itself. Right? And that created a big problem. So it's not that different from actually doing underwriting or due diligence based on how you're thinking about investments in all kinds of industries. 

Matt: Yeah. And just so I just one point to add, I think we are seeing more and more of the Web3 native or Fintech companies that actually have the innovative solutions now partnering up with the incumbents because ironically, investors want to be able to trust in the brand, the reputation of whoever's providing that service. And Web3 native companies have the technology but don't have the trusted brand. The incumbents have the trusted brand but don't have the technology. So I think we're seeing more and more of these sort of partnerships and mergers happening, and I think that will continue in order to open this up to a broader investment. 

Ric: And that argues for the company route because of the M&A activity, which really capitalizes on stock growth and the leverage that occurs with all of that. So anything to add, Matthieu? 

Matthieu: The only thing I'd add is, there's obviously different considerations and liquidity profile that you're looking at, whether you're looking at buying the coin or the the supporting infrastructure companies that I think everything else. 

Ric: So this is why we have these very different types of exhibitors in the exhibit hall, because as you're discovering, some of them give you the direct access to the coins or packaging of coins or management of coins, and others are giving you the access to the companies in managed and indexed ways so that you can decide what works best for your client and your practice management. Because it isn't a right or wrong. This is all part of the judgment, but it's a fundamental question that we all have to answer for our practices. No question. And any questions from you? We've got a microphone coming right over here. 

Audience Member: Thank you. So if we look at this as any other technology on the as it emerges, Right? So if we go back to the PC, eventually you had the PC model, you had Apple, Right? PCs tended to win out really early. Right? Because they had they were easy to adapt. Right? The businesses adapt, grabbed them. When we get into Internet. Right? Whoever is able to make money, Amazon just comes out right? Eventually survives and thrives. Right? Ease of doing business. Same thing with Google, ease of use. In this marketplace, in this technology and blockchain specifically, the coins are a whole, I think, a completely separate discussion. But in blockchain, if we're advising business owners, right, especially small business owners, I think on corporate America, they're going to they're going to pick a lane, and they're going to develop their piece. They've got the capital to do that. Small businesses are going to have to plug and play to make money here. I speak specifically to trucking, right? Trucking. The independent truckers are you get into intermodal, they're going to have to deal with Maersk and all the other companies who are tracking their boxes. How are they going to be able to decide how to capitalize? Because they really need the efficiency. They have very low margins, but they could increase those margins from maybe 3% to somewhere around 7 or 8%, maybe even ten. And they could compete and grow their businesses and treat their businesses like an investment. So how could they capitalize in the blockchain technology? Who are emerging as maybe the two or three top players that would be ease of doing business and plug and play for these small businesses and would be adaptable? That's where we could actually see long term, what, regardless of what happens in the next two, three years in regulatory, right, we all know that's political. But ultimately we could be helping our clients, either as small business owners or as individuals positioned to accumulate some of those assets now while they're cheap. Right? So how do we know? Who are those players right there? Right? That's not readily available information without serious research. 

Julian: Yeah, maybe I can start. So trucking is a good example. There's actually and I can't remember the name, the exact acronym, but there is an association of truckers or transportation companies that have come together to explore different blockchain solutions. So I'm not going to answer the question, but I will basically say that they're directly but indirectly this association is exploring different options. And what's really interesting about logistics more broadly, not just trucking, is again, this speaks to like we don't exactly know what it's going to be, what blockchain technology will solve for, because the most obvious is supply chain that is already in the market. And there are certain solutions that are being tested. But there are really interesting emerging solutions around fleet management, around real time telemetry of vehicles and around being able to absorb all that information and get it around having vehicles basically carry their own value, be able to self-charge themselves. I mean, there's just so many different things that blockchain technology and its derivatives can do that are just now being explored. And so I think from that perspective, you know, I would look towards these industry consortiums and understand what they're what they're building on and what and what sort of technology they're leveraging. 

Matt: And in terms of what they're building on, there's definitely two options going on out there at the moment. One is the public permissionless blockchains. Frankly, we've heard about several this morning issuance on Stellar issuance, on Polygon, historically issuing on Ethereum. I think that model has real value in that we're using blockchains that at the moment are being used at scale. They have some degree of adoption, they have utility, and therefore you can see that's a route to actually scaling the application. At the same time, there are lots of folks out there saying, actually, I don't want a truly public permissionless blockchain where anybody can potentially become a node and therefore get access to the full stack. I want to be part of a private instance, either a private blockchain or a private instance of one of those public chains. And we're not advocating for either one right now because I think it's a little bit horses for courses. But I would just caution to say if you're looking to engage with a consortium, involve in a business case, build some. Out be super critical and objective on, are we actually deriving value from this? Is it delivering a business case with benefits or am I just following this like FOMO, mustn't miss the wave? Because I think that has been the lesson learned from the last few years. 

Ric: One of the frustrations you raise is the difficulty in identifying who these companies are. I think you'll get a lot of those answers in the exhibit hall. Talk to Global X, talk to Fidelity and Invesco and Bitwise and others who are there because they are familiar with those companies, because they're putting them in their indexes, they're putting them into their funds. So they can tell you how they're going about identifying and how they're determining who to include and exclude. And the reasons why. I think that could be a good jumping off point. And you can either decide this is how you can follow that path and do it yourself or delegate it to them the way you do other ETFs. So I think that would be a good way to go about it. Time for one more question. 

Audience member: Thank you, gentlemen. I'm curious about what inroads are being made with entrenched business models like the real estate settlement process, titling and foreign exchange. What's new on those fronts that have massive entrenched business models and the disruptive nature of blockchain to take away their punchbowl? When is it coming and who will lead the way? 

Matt: I love these crystal ball questions. I'll start with you... 

Ric: You are McKinsey, after all.  

Matt: So, okay, let's take those two things. Real estate and FX. And on the real estate side, the promise has been I can tokenize these great big, hulking, illiquid assets, I can fractionalize them, I can find liquidity, I can use that tokenized asset for something. And I think actually it's a pretty powerful promise. I would say we've been approached by a number of organizations, particularly big infrastructure funds, to look at what it would take to do that. What's missing, of course, is the actual ecosystem around it that says, Yeah, I've got buy-side, sell-side liquidity demand to do this. And I think that gives us some some some grace time to say I don't know how long before it gets there. We are seeing the first buildings and infrastructure projects getting tokenized. But going back to that S-curve, we are... 

Ric: We've got the huge building in Dubai. We've got the Saint Regis in Aspen. 

Matt: Aspen, Exactly. Yeah, but but, you know, onesies and twosies... 

Ric: The fact that we can name two is a problem. 

Matt: Exactly. So I think super early. Likewise on the FX side as we see the tokenization of fiat currency, whether that's stablecoins, whether it's the central bank, digital currencies or others, that is step one. To me, the real exciting thing would be can we actually replace traditional FX desks with some of these constructs coming out of Defi like the automated market makers that basically just create these automated contracts that rebalance depending on the availability of one currency or another and automatically reprice? We're not there. But again, the ability to do it is there. We just haven't seen any of the shifts to really take it seriously. And on the latter one, my analogy is always: what happened to cross-border payments? You know, ten years ago, when I was early in my days at McKinsey, there was this shift from traditional corresponding correspondent banking into same day cross-border. And it's taken ten years to get to where we are today. 

Ric: We're going to have to leave it there. Thank our speakers, Matt, Julian and Matthieu from McKinsey and Company. Gentlemen, thank you very much.  

Ric: That's my conversation with the folks from McKinsey at the fifth annual DACFP VISION conference in Austin. In coming weeks here on the podcast, I'll be presenting you with additional conversations from the conference. Right now, though, you can check out the photos and other highlights of VISION. It's all on my Facebook, Twitter and Instagram pages. And the links are in the show notes. 

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