Understanding Tokenization: Insights from Morgan Krupetsky at Ava Labs

Tokenization is a concept that has been around for years, but according to Morgan Krupetsky of Ava Labs, it is now here to stay. As one of the significant narratives in the world of cryptocurrencies, tokenization promises increased efficiency, liquidity, and accessibility. However, while many institutions are entering this space, the reality still presents a mixed picture.

Key Takeaways

Tokenization has been explored since 2017, yet many projects are still not live.
Stablecoins are the clearest success story, with a market cap of over $280 billion.
The private credit sector shows promise for tokenization as it allows for automated yield-bearing products.
Human decision-making will always play a crucial role, despite advancements in technology and automation.
Tokenization does not automatically ensure compliance or market liquidity; these factors rely on human governance and demand.
The regulatory landscape in the U.S. is shifting positively, encouraging more institutions to adopt blockchain technologies.
Ava Labs aims to digitize diverse assets and enhance access to the Avalanche ecosystem.

Morgan Krupetsky, Senior Director of Institutions and Capital Markets at Ava Labs, the company behind Avalanche

In an interview with Crypto.news, Krupetsky shared insights on Avalanche's early involvement in tokenization and the importance of distinguishing between genuine advancements and mere hype around the concept.

The Hype vs. Reality of Tokenization

Crypto.news: In your article “Tokenization 101,” you suggested that much of tokenization is still hype. What do you believe is exaggerated, and what holds merit?

Morgan Krupetsky: The concept of tokenization isn't new—it's been in experimentation since 2017. While we’ve seen various announcements regarding tokenizing everything from uranium to architectural wonders like the Burj Khalifa, many are mere announcements without tangible products. It's essential to refer to metrics, such as those on RWA.xyz, to distinguish between what is genuinely available on-chain and what exists only in marketing.

So far, stablecoins have emerged as the leading example of a successful tokenized asset, boasting a market cap exceeding $280 billion. This has also sparked interest in tokenized money market funds, which are still in early stages but growing. We see increasing activity around stablecoins branching into private credit and ongoing experiments in tokenizing equities and collectibles. The critical challenge remains to differentiate between practical developments and empty hype.

Promising Tokenization Sectors

Crypto.news: Beyond stablecoins, which areas of tokenization do you find most promising, considering regulatory and technical factors?

MK: I am particularly enthusiastic about private credit. These products generate yields, making the benefits of tokenization clearly tangible. For example, in private equity, the value from on-chain operations is less apparent since they don't generate frequent disbursements. By contrast, credit products showcase immediate advantages from programmability.

We’re currently focused on asset-backed finance (ABF), utilizing stablecoins to enhance efficiency in the lending process. Following the global financial crisis, there was a shift as banks reduced their lending presence, leading fintech originators and private credit firms to fill the gap. However, major alternative asset managers currently dominate the ABF space. By employing programmable solutions with stablecoins, we can create opportunities for smaller funds and emerging managers to engage in ABF, which is anticipated to grow significantly in the coming years.

Technology Enhancing Decision-Making

Crypto.news: In the past, some companies like Carvana and Zillow attempted to automate lending but faced mixed outcomes. How do you view automation in lending decisions?

MK: The objective isn't to eliminate human decision-making; it's about providing better tools for institutions and individuals. Current AI applications are focused more on assisting decision-making rather than replacing expertise. Blockchain technology standardizes and verifies data more quickly, allowing for faster, data-driven decisions instead of relying on outdated spreadsheets.

The same misconception applies to tokenization; simply tokenizing an asset does not ensure demand or liquidity. Tokenization offers the tools to facilitate markets but doesn't guarantee market creation without genuine demand.

Risks in Tokenization

Crypto.news: There are concerns about risks in tokenization, especially regarding transparency and compliance among asset fund issuers. How effectively do tokenized asset issuers use blockchain's transparency features?

MK: Just like tokenization doesn’t guarantee liquidity or market demand, it also doesn’t ensure compliance. Technology serves as a tool that can support regulatory frameworks but doesn't create them; such regulations must come from the involved institutions and regulators.

In our private credit initiatives, we leverage blockchain to achieve better risk-adjusted returns while increasing transparency for fintech originators, thus enabling them to manage compliance better. Ultimately, compliance rests on each issuer’s commitment to ensuring their tokens adhere to regulations based on their assets and jurisdictions.

Regulatory Landscape for Tokenized Assets

Crypto.news: How do you perceive the current regulatory environment in the U.S. regarding tokenized assets?

MK: The regulatory landscape has evolved significantly since the last election, providing a boost for the industry. Institutions, banks, and asset managers are now more receptive to exploring public blockchain infrastructures, which has shifted the nature of discussions.

Tokenized assets mostly realize their full potential when a greater part of the asset lifecycle is managed directly on-chain. Attempting to manage off-chain assets concurrently with on-chain systems introduces complications. As we progress, I foresee more assets being issued natively on-chain, but we are still navigating this transition phase.

Ideally, the long-term vision includes stablecoins being widely accepted for daily transactions, with assets tokenized from inception, all managed on-chain. This scenario would allow for composability and programmability to shine. For instance, inactive assets could accrue interests while held in escrow, but we aren't there yet.

I recognize the challenges traditional banks face, many of which have operated for centuries. Major overhauls of their systems are costly and disruptive, so they require a compelling business case or perceived threat before making significant changes. Meanwhile, neobanks and fintech companies have more agility to experiment.

The Role of DeFi and Traditional Players

Crypto.news: With firms like Nasdaq pursuing tokenized equities and Mastercard looking into stablecoins, can decentralized finance (DeFi) compete with traditional players?

MK: Public, permissionless DeFi will always have its role, but we're currently witnessing a convergence of DeFi, centralized finance (CeFi), and tokenization. When I joined Ava Labs three years ago, these realms felt distinct. Now, they are integrating, and this trend is likely to continue.

Institutions might not leap directly into DeFi platforms, but DeFi elements can definitely empower fintechs and other platforms. We've already seen exchanges implementing earning programs that rely on DeFi integrations in the background.

From a tokenization perspective, successfully gaining user acceptance often means integrating with existing platforms like Nasdaq or investment apps such as Robinhood. The blockchain protocol should remain hidden from end users, who primarily care about improved financial products. For instance, the ability to spend directly from a tokenized money market fund via a debit card would exemplify the kind of experience that drives mass adoption, with Web3 infrastructure supporting it behind the scenes.

Ava Labs' Contributions to Tokenization

Crypto.news: Can you outline what Ava Labs has been doing within the tokenization space?

MK: From the beginning, our mission has focused on digitizing and tokenizing global assets. Many of us were engaged in tokenization even before it became a mainstream narrative known as “RWAs.” We recognized early on the potential of bringing valuable assets onto the blockchain.

One of our notable achievements was collaborating with Securitize and KKR to tokenize a portion of their healthcare growth fund in 2021 before tokenization became widely discussed. This demonstrated the capability of efficiently bringing high-quality assets on-chain.

Since then, our focus has been on two main areas: obtaining premium tokenized assets from leading managers like Apollo and BlackRock while building distribution channels through Avalanche-based platforms. We're actively reaching out to potential partners to facilitate access to tokenized assets for investors using familiar channels.

Much of the liquidity still resides off-chain, and bridging this liquidity with tokenized assets via traditional distribution methods is essential for adoption before we see significant change.

The Avalanche Treasury Initiative

Crypto.news: What can you tell us about the Avalanche treasury initiative?

MK: I view it as a means for a wider array of investors to engage with the Avalanche ecosystem. Not everyone is ready to hold tokens directly or to set up a Web3 wallet, so there’s still work to be done on usability in the industry.

Products like this resemble ETFs or ETPs, offering a structure that is more comprehensible to investors, including both institutions and individuals seeking exposure but who prefer traditional formats. It ultimately makes the Avalanche ecosystem more accessible for those who might otherwise hesitate to participate.

Ongoing Challenges to Achieve Broader Vision

MK: We have consistently prioritized institutions and on-chain financial systems, and that emphasis continues. We're doubling our efforts in areas like DeFi, payments, treasury tokenization, and wholesale finance. While there's much to be proud of regarding our progress, we acknowledge that much work lies ahead.

The reality is that mass adoption has not been achieved yet; institutional liquidity isn't flowing seamlessly into on-chain assets. While key components like custodians, compliance frameworks, and tokenization platforms are largely in place, we haven’t reached the stage where the industry can confidently declare success.

I liken this to the early days of the internet. Back then, people would talk about “internet companies.” Today, every company utilizes the internet, and the distinction is no longer necessary. We will recognize a similar milestone when blockchain technology becomes an integral part of operations across enterprises, governments, and financial institutions, at which point the term “blockchain company” will be irrelevant—it's just how the world functions.