B (3:24)

All right everybody, welcome back to another action packed episode here of the Crypto 101 podcast. And might I even say welcome back to me. Brendan, thank you for holding down the fort. I know it's been, it's been a, a lot that you've had to, to bite off while I was enjoying a paternity leave with my newborn and my wife and a toddler. So it was crazy, but it's been a lot of fun. Uh, it was really rejuvenating and man, I've been chomping at the bit to get back on the desk though the markets have been moving fast. We've just had an incredible list of just guests that have come on. So Brandon, I've been a little jealous, to be honest of you, that you've been in the driver's seat getting to interview all these great guests. How have you been? Before we introduce our incredible guests for today, what's the update by you? Man?

C (4:17)

It's been great. I know, I was gonna say I felt like I should be the one welcoming you back, but no, it's good to have you. I know the listener listeners have missed you. It's been good over here. I mean, shout out to super producer TiVo. The guests have been just non stop bangers. We've talked to different asset managers, different ETF providers. We just got off with Solana Foundation. There's, there's so much going on and I think the only way that we could one up this is by bringing in the guests that we have here today. And this is going to hit home for a lot of people out there because we get questions like this all the time. And you know what, Bryce, I'm not a tax person. You're not a tax person when it comes to accounting and all this stuff. I can gladly, maybe not gladly, but I can say that's not our forte. That's not our expertise.

B (5:06)

But we pay people for that, right?

C (5:07)

We do, we do. And the cool thing is, though, we get to talk to people from all different areas. And I don't want to spoil it, but I'll hand it back off to you because if you can't tell, I'm a little bit hyped up about today's episode.

B (5:20)

Yeah, everybody who's listening, this is going to be one where you're going to want to, you know, click slow down, maybe pause it here and there, bring a notepad, have your iPhone notes app ready, because there's going to be a lot of golden wisdom. I'll let Tony say his disclaimers and disclosures and all that kind of stuff, but I'm so excited. Tony Toots, welcome to the show. KPMG's senior tax partner and global leader of the digital assets tax team. KPMG is one of the big four accounting and professional services firms. Tony, thank you for joining us today. And how are you?

D (5:56)

Very good. Yeah. And thank you, Bryce. Thank you, Brendan, for having me on. And yeah, a little disclaimer. Everything I say here, it's my own view. My own opinion doesn't represent the view of kpmg. But yeah, no, happy to be here. As you might notice, it's tax season, so it's busy for us. We're pumping out tax returns, trying to help our clients get filed on time inaccurately. And so, yeah, no, really busy. And as you guys were noticing, it's very busy in the digital asset industry as a whole. And so there's been a lot of transactions this year. There's been a lot of trading this year. And so now comes the time where we got to collect that information and report it to the government.

B (6:35)

Absolutely.

D (6:36)

No.

B (6:36)

Well, first off, we just appreciate you taking the time out of a very busy season. And yeah, I think we've all. Anybody who's listening to this show has probably noticed the rollout of the new 1099 DAs. So that's something maybe we'll pick your brain on. But. But first, let's just zoom out and get you acquainted with us and our audience. We just want to know a little bit about you personally and particularly, you know, with the backdrop of how did you come into crypto and lead, I mean, the big four accounting firm in kpmg? How do you lead the. The digital asset Tax arena there.

D (7:12)

Yeah, you know, funny story, the never really had an interest in crypto, to be quite honest. But my. I am a tax lawyer by background, and before I came to kpmg, when I was working in law firm life, my specialty was financial products. And so when crypto first came on the scene and we're talking like this is back in 2010, 2011, and people said, well, yeah, you know, someone's got to take a look at this so that we can advise clients. We have to know what it is. So it looked like felt, smelled like a financial product. So they gave it to me and they said, here, figure this out. And so I just, you know, I figured it out, I took an interest, I read a lot, but I never really spent that much time with it until about 2016, 2017, our clients, KPMG clients, just started asking. And so it started ramping up. By 2018, it was taking off like you wouldn't believe. By 2019, I couldn't do anything else. So that's how we got here.

B (8:11)

And has it become. Has it become a pretty substantial part of KPMG's business or is it still a smaller emerging, you know, area?

D (8:20)

It absolutely has become its own separate asset class and its own area within the firm, that's for sure. But true, as you compare it to the mortgage market or, you know, the capital markets in general, or some of our other industry groups now still small by comparison, but when you look at growth, it is the fastest growing section of our firm.

B (8:42)

Yes, I bet there's a lot of folks at KPMG that are jealous of your role. But I'm curious, just from a philosophical and personal standpoint, you could have done any sort of role and what made you hone in on crypto? What was attractive or fragrant about the crypto and blockchain ecosystem that made you say, hey, I kind of want to dedicate my career to this particular asset class. What was it about it?

D (9:14)

Yeah, the real thing that's interesting to me is we don't have a lot of rules. And so trying to figure out how things ought to be treated from a tax and accounting perspective when we don't have rules from a regulator or a government telling us you do this, well, that's exciting. It's interesting to be able to come up with that policy yourself. And then on the other hand, we, once the government does come around to start looking at it, which they do, they're always a few steps behind industry. But once they do, then having that ability to go sit in front of regulators and legislators and teach them and help them and help them form what the, what the, the laws are going to be and the regulations are going to be in the future that are going to guide this space. That's really exciting to me. And you know, just like when I first came into this world, professional world, that is after law school, it was a time in history, I'm dating myself. But it was a time in history when derivatives were really becoming a big, big thing on Wall Street. And same thing, we did not have rules about how derivatives ought to be treated in different situations, how they ought to be taxed, what the collateral requirements should be, all these kinds of things. We didn't know we had to make it up as we went along and then we taught the governments how to do it. Now we're seeing that again, same cycles happening again here in digital assets.

C (10:30)

Well, how I guess should listeners and I guess there's two ways to look at this, right, because you have retail and the everyday people and then you have companies and institutions. But how should I guess both sides be looking at crypto taxes and crypto accounting? Because even between those two groups, right, if you institutional and you have retail, I'd say that the retail side has become fairly easy. Meaning that if you're going through a centralized exchange, they typically send you a form. But a lot of people get confused about their on chain transactions where they're using wallets and you know, their software is out there for it now. But I guess just generally speaking and go as much into the weeds on this as you want. But how should people be looking at crypto taxes and accounting right now?

D (11:15)

Yeah, I think for most retail people the accounting isn't that difficult. But what's difficult is getting all the data. I mean, if you trade regularly, it piles up as the year goes on. And if you're not keeping track of it, it's really hard to compile it and synthesize it at the end of the year in order to be able to do your taxes and report it. Now in the, in the regular tradfi space, I don't care which of your favorite bank brokerage, whatever it is that you're trading on, they send you a really nice complete report and everything is outlined. You know, here, this type of transactions, here's your total, here's your trades, here's your total gains and losses income, you don't really get that yet. Like as you, as you were saying, Brendan? Yeah, if I only traded on a centralized exchange and I only bought and sold sure, maybe I can make sense of that. But if I go a little bit further, a little bit deeper, and if I go to DeFi and I go off the exchange, all of a sudden, all bets are off. I need to be keeping track of my trades, my income, what's happening. One day we will get reports like that from everywhere. But until then, it's up to the act trader, the taxpayer, to keep track of their own data and then be able to report that. And by the way, even once I do get all the data, well, it's still not all that easy if I'm doing a lot of different types of trades, because there are some things I don't know. Right. I mean, I do know if I transfer tokens between my two wallets, that's not taxable. But if I send my token to some DeFi protocol and I get a D5 token in exchange, some of those are taxable, some of them are not. How do you figure that out? Where's the rule that tells you that? And so a lot of those kinds of things are. Are difficult. And then when I do get rewards from some of these protocols, when was it taxable? What was the value of that token when it did become taxable? And where is that data? Where is that record? And so some of this is just a data problem, some of it's a rule problem. But, yeah, I think for, for retail people, that's the gist of it. On the institutional side there, it's the exact opposite. Right. I think the institutions need to, to the extent that they're dealing with retail customers, they need to do this reporting for them. They need to figure it out and put it in a very understandable format and put it in a way that can be downloaded electronically. So I think for them, they're on the other side of that. And then, of course, the other thing on the institutional side is not so much on their tax reporting, but just being able to use it in their own business operations, because that's where the real value of this comes in for the. For the broader institutional world.

A (13:53)

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E (17:59)

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B (19:52)

absolutely and excuse me, I I definitely remember April of I believe it was last year. Trump signed something. You might have to correct me on specific something to repeal this IRS DeFi broker rule. And maybe you could just give us give our listeners a little color on what that was. I think it was the Congressional Review act that was proposing that uniswap and radium and you know, cow swap, all these different decentralized protocols that don't know your Social Security number, they don't know your name, they don't know you from Adam. You're just a random user. You could be anywhere in the world at any time and you could use these open source Internet protocols. They were the IRS was trying to basically make it so that they would have to have all of this KYC information and reporting, but that was repealed and I just wanted a little color on how you're viewing that.

D (20:49)

Yeah, it's good and bad and so good in the sense that as you were saying, I don't know, should we all have to identify ourselves and put our personally identifying information into every defi protocol we touch just so that we can get some sort of tax reporting back. So perhaps good on that side, but bad in the sense of I am a taxpayer, I do want to do the right thing, I'm trying to comply. I, I need the information, but now there's a whole bunch of information missing. And worse than that, much worse than that, if you ask me. These 1099 DA reporting rules came out. They got passed in two parts. One was the centralized exchange piece, one was the DeFi piece. Centralized exchange piece still exists, but the defi, as you said, the Congressional Review act, they repealed it. Well, that leaves a gaping hole and it affects the Centralized exchange part. So now what happens is you go on some centralized exchange and you buy a token. Great. And your cost basis is $10. If you stay on that centralized exchange and you trade things in and out of there, at least that $10 base tax basis is known and it'll get reported and it can travel around to your other assets as you move around. But if you take it off that exchange, I don't care where you put it, you put it in your own self custody wallet or you sent it to a defi protocol and then it comes back. Now we have a problem because those defi rules got repealed. There's no information coming back from them. So now your centralized exchange has no idea what the basis is. That's why everybody this year they got their 1099 DA's. Well there's two reasons for one, the basis was missing because of that. But also this year even the centralized exchanges didn't have to report tax basis. Some did. They didn't have to next year they have to. And so, but where's it going to come from? Unless that asset stayed on the centralized exchange from start to finish, the second it left, the basis was gone. What does that mean? Well fine, you know you bought it for $10 and you know you sold it for $12. So your gain is 2 if you, if you remember that and you have those records with you. But the centralized exchange does not because you moved it off exchange and you brought it back on. They put the basis as zero. So and you sold it for 12. They're going to report $12 a game. They're not doing anything wrong. They're doing exactly what they're supposed to do. What was supposed to happen was when that token went off the exchange to some defi protocol, the centralized exchange was supposed to report out to the defi protocol. Here's what the basis is. $10, remember that. And when it came back in they were supposed the defi protocol was supposed to tell the centralized Exchange basis is $10. Remember that. Now that doesn't exist. Basis goes away. The whole system is broken now. So it's a little goofy.

B (23:33)

Yeah, lack of continuity there. But I mean so the, the you know, taxing authorities are then relying on your self reported, is that right? Your self reported transaction. I think it's the form 8943.

D (23:46)

Correct me if I'm wrong, 8949 is the one you use to correct what's broken on the 1099. Well now usually on your 8949 for an individual, there might be a couple of items. Now, for the, you know, normal trader, it's pages and pages because it's all wrong and you're trying to fix it. You know, it gets, it gets very messy. And as you might imagine, I hate to say this, human nature, though, when we're self reporting, sometimes our memory is a little fuzzy and we self report a little better number than maybe reality had, you know, so it's not a good situation to have. And so I do believe at some point down the road we are going to get to a place where we're all going to say, all right, we can't do it this way. We have to have a better method of tracking tax basis. Yeah.

C (24:38)

And I think that that's been a big part of what you all have been working on. I think from a public eye, from a public perspective, everyone's seen the crypto industry grow, they've seen adoption increase. And there, to your point, there's been a lot of changes and people naturally have questions about this stuff. But what have you noticed? Maybe more from like, I guess, both the retail and the institutional side, what have you noticed the most? Because if you've looked at Bryce, we've referenced this before, but if you look at the total number of companies, whether private or public, that have put crypto onto their balance sheet, I mean, that number has skyrocketed over the last several years. I'm sure you've had plenty of conversations about audits and taking care of some of these accounting needs. I mean, what have been some of the top standouts or revelations that you've come to as you've seen this, this whole thing kind of rise into popularity.

D (25:35)

So one of the main things we've seen is that, you know, trying to track the data around movements of tokens, even though the blockchain is an awesome technology, right. I have this immutable data trail right there. I can go back and use it, but there's no quick and easy way to do that. That will change in the future, I'm sure. And that's the trick of all of this, I believe, is we have to actually use the blockchain technology itself to help us solve this problem. And we will. But in the meantime, what we're doing is, you know what, let's stop hurting ourselves. There's plenty of off the shelf software we can use that help us track this and organize it, and so let's try to use that where we can. And so I think everybody who is a sophisticated player in this space who's doing anything more than just buying a token and holding it, is using some form one of these software platforms where they can basically track this stuff and make sense of it, because that's really what you need to do. Until one day all the protocols and all the centralized exchanges start reporting to us in nice clean data the way TRADFI does currently. This is what we have to do. It's a little self help, but it works. And when used properly, I think it works great. Yeah.

B (26:56)

And, you know, I'm not sure if, if you'll be able to answer this question, but we'll keep it anyway, anyways, because there's so many softwares out there and they're not all created equal. Right. Some are, you know, high caliber, some are just pieced together. Some people are probably, you know, building their own with, you know, Claude code and all these kind of stuff to track all their wallets. So who knows what's out there? But do you or does KPMG as a firm, are there any recommendations of what tax softwares that retail folks can use to prep? I mean, maybe, you know, you guys recommend them or is it, you know, everything that you guys do is just in house. And how does that kind of work?

D (27:35)

Well, personally, I recommend KPMG because, you know, we do offer this as a service to clients. And so, you know, KPMG does do it. KPMG also goes in and verifies the tax engine that a lot of the large pro, the large software providers use. So, yeah, I don't want to name people and say one's better than the other, but you do want to look for ones, the bigger ones that institutions use. Because it might not have been kpmg, but some large accounting firm has gone in and verified their tax engine to make sure it's working the way it should and it's organizing transactions the way it should. Because the last thing you want to have happen is, all right, I use this, but it's conflating my data and giving me the wrong tax basis or it's picking out these transactions that call them taxable when they really shouldn't have been taxable. We see that a lot of sometimes. So there's things like that you want to watch. But I think a lot of the, you know, the big names in this space have all been tried and tested. And so I think you can use most of those with confidence.

C (28:37)

Yeah, well, you know, kind of going back to a point that we made earlier, there's been a lot of changes over the last several years. You've seen all sorts of different regulations and new bills. And the big one on everyone's mind here, the big ones that we've seen is the Genius act last year and now everyone's looking towards the Clarity act this year. What are your big takeaways from those? What changes? The most kind of came out of that.

D (29:06)

Well, on the Genius, which was really focused on stablecoins, that is really, really useful, you're not seeing the impact quite yet. And the reason for that is all the regulations that implement the Genius act, they're due in July of this year. So following July you'll start to see it happen. They'll be popping up all over the place and you'll see them designated as payment stablecoins and you will start to see many more retailers accepting stablecoin as payment. Because really what we're talking about, we don't have a cbdc, you know, a centralized digital currency in the US but so Stable payment stablecoins that are verified under the Genius act, that's what's going to be our digital dollar in the United States. And so very rapidly you're going to see mass America through the retailers start to make this the official currency of the US and this is how you'll buy and sell things. And you're already seeing it in the sense that some of the payment processors that you very well know, the big, the big credit card firms in the US that you're probably using all the time, it's in your wallet right now. They are, they are using stable coins now in behind themselves. Right. So there's still the point of sale terminal and you can still use your credit card if you want. But behind the scenes it's going to be a stablecoin that moves across the rails because it's faster and it's cheaper. And so that's one way you'll see it. But the other way is you will also start to see retailers just accept stable as payment. You know, consumer to retailer payment without any intermediary at all. That'll be next.

B (30:53)

This could be a little bit like the Trojan horse, if you will, for Bitcoin and Ethereum and all these different, more volatile assets. As you know, people are getting, going to get more comfortable, right? They're going to be checking out at Target and you know, they'll see paying USDC as an option, what's that, you know, or Stable Coin or whatever it's going to say. And they're just like, oh my gosh, like if I could pay with gas or pay Gas with stable coins and buy stuff, you know, groceries, then hey, maybe this stuff isn't just an outright scam because if you go and you talk to, you know, the majority of, you know, when you think about demographically who has most money, it's not my generation that has most of the money, it's the older generation. Right. Just by demographic trends. You know, like my, the boomer generation, they've got all the money, but they're like the most skeptical of crypto because you can't use it anywhere. Whenever I talk to my dad's friends, well, where can you use Bitcoin? You know, done. If you can't use it anywhere, it's not going to work. And I'm like, oh my God. Okay, just I'll have a conversation with you a little in a different day. It's. And so like once you could say, okay, well the crypto technology is now validated by visa, validated by MasterCard. They're using it and it's just going to make people more comfortable. And so that July date is a really key inflection point. I think that, you know, Mass America is going to start to get exposure to this and it's going to be in a sense, a little bit of marketing for crypto. So I'm really looking forward to that and I really appreciate you kind of putting that on our radar. And if we shift to the Clarity Act, I'm not sure if it has much, you know, about stable coins or tax implication and you could speak to that. But how are you kind of keeping tabs on the Clarity act and what are the key tenants of that that you think are most important?

D (32:39)

Yeah, so we really do need the Clarity Act. So, you know, genius act was great because, you know, that allows for stablecoins when it comes into full force after this summer, you'll see a lot of stablecoin usage amongst people and retailers, but we need it to be at the financial institutions as well. So if I'm going to be paying people with stablecoin, for example, do I, obviously I can do it in my self custody wallet where I can use, you know, one of the large centralized exchanges. But what I would really love to happen is have all my money in my favorite bank that I normally use on my normal app on my phone and I want to send money from there and sometimes I want to send real money, US dollars, sometimes I want to send USDC USDT out of that but I can't right now because the banking system doesn't feel comfortable using it. Even though the occ, the Fed and the FDIC have all already come out and said, go ahead, you can do it, we still need rules. Who's my, who's my primary regulator for this asset? That's what's in the Clarity Act. That's why we need that. Once we have it, then the banks will say, I know exactly the registration, the license, whatever it is that I need to go get and I could do this. And they will do it immediately. And so the Clarity act is being held up a little bit right now. However, big, big applause to the CFTC and the sec. They put out their own memorandum of understanding, they're putting out their own rules right now about which branch is doing what and they're starting to write their own rules ahead of the Clarity Act. So normally you get the legislation first and then the regulators write their rules. This one's going in reverse. The regulators are hopping out in front of it and they're writing their rules. And I think that's really great because now what we're seeing is, hey, the CFTC is going to take the lead on most of this. That's going to be the primary regulator for most of what the banks need to do. And you know, it's not good or bad, but as long as the banks know, fine, I'll go register, I'll get the license I need to have and this is how we're going to do business. So that's fantastic. So that is moving forward right now as we speak. So I hope the Clarity act gets passed anyway because the real fear of just letting the regulators run the front of it is that that's great, it'll work for now, but as soon as we get the next administration in the White House, they can just change those rules. But if it gets passed into law, that's much harder to change. So that's why we want this.

B (35:10)

And I know you've been, you've been tracking a lot with the Senate Banking Committee and, and everything that's kind of going on there. So are you saying that's kind of the sticking point? Because I think the, the Senate Agricultural Committee, who's the, the commodities, they're kind of already rolling through and past their version. So it's really maybe the banking lobbyists that are fighting this the most, they don't want to give up their net interest income. It seems like a big sticking point. We've seen Brian Armstrong pretty much go knock down, drag out war with everybody who's, who's on the opposite side. What are some of the just. Again, speaking from a personal standpoint, what are some of the dynamics there that you find most interesting and worth discussion?

D (35:55)

Yeah, I think the thing that I find incredibly interesting is that the banking lobby is still pushing for keeping this moat around their regulated castle and saying, well, you have to be a bank to be able to do this or that. And I obviously, you know, economics, I completely understand why they want to do that, but they have to realize, though, that they've lost that fight already, right? I mean, eventually. I mean, right now, today, if people felt comfortable using crypto on a daily basis, they don't need the bank. Everybody can pay everybody else with their phone, and it doesn't have to go through a banking institution. So they know that that's coming for them. So the only thing they're doing here is delaying that. But that is coming. But what I would say in their favor is that, all right, if they can delay it, maybe they can get out in front of it, they can harness it, maybe they can use it, what have you. But pushing back on this whole yield thing, though, does raise one important point for the, for the crypto lobby, which is, hey, there are rules. You might not like them. You can go get them changed if you want them. But, but to try to sit there and say, well, you know, my Stablecoin can pay yield and I don't have to register that as a security. I don't have to go Register under the 40 act or anything, because mine is different, it's new. That's unfair. Because, you know, we do have, you know, if you think about what a Stablecoin is, right, it, you, you buy this thing that links to a collection of Treasuries, overnight repos, things like that, and that all pays interest, and now they want to pass that yield on to you. Well, I already have something like that, right. It's called the money market fund. And a money market fund is registered under the 40 Act. So how come you don't, you know, and by the way, I'm all for saying, you know, things that are backed by Treasuries shouldn't have to Register on the 40Act, should be freely transferable. But go change the rule. Go change the rule. Change it for money market funds. Change it for you with a Stablecoin. Do that. But don't just sit there and say, mine's new. Mine has a different name, so I don't have to use these rules. That seems unfair.

C (38:09)

I get that you've seen a little bit of a back and forth here. I'VE enjoyed it. I've kind of cooked up some popcorn as I've been watching the banks and the crypto companies duke it out, exchange comments, sometimes exchange insults. It's almost like a pay per view event.

B (38:25)

But yeah, we don't, we don't watch reality TV or sports, but by God, do we love watching the, the politics of crypto unfold.

C (38:33)

It is. And especially when you have like what Kraken has been doing and Coinbase has been doing compared to what like JP Morgan has been saying in some of these, some of these banks, man, it's entertaining watching the timelines, but to some degree, I mean, I can understand the frustration of the crypto side because they're saying, hey, this has been our industry. And then the banks are trying to come in and make all the rules and regulations and say, well, we know what's best and we've done this the financial space the longest. And it gets the crypto people frustrated because they're like, what in the world? Like, why isn't our opinion being valued as much? And then the bank side are saying, and the banks and the asset managers are saying, well, we have the most capital, we have the larger industry, so we get to make the rules. And so you have this butting of heads about which group thinks their idea is the best and obviously they're going to have disagreements. The way that I look at this is that there's going to have to be give and take from both sides. The crypto people are going to get some things that they're going to really want and then the banks are going to say, hey, these are non negotiables for us. And I see us meeting towards the middle. I've seen a lot of people saying, well, no, it's going to be all this side or all that side. I don't see it as so black and white. Eventually I see both sides coming together. I think the Clarity act is probably being pushed back a little bit right now because there's so much other stuff going on. But I do see this coming back into full view as something that is going to be a priority again. But you have Larry Fink, right, the world's head of blackrock, which is the world's largest asset manager, saying that the future of all assets is on chain and that he's basically saying, hey, get with this or get lost. And there's been a lot of talks about tokenization and real world assets and all these things. How do you think that these fit into the financial world when you manage

E (40:19)

procurement for multiple facilities, every order matters. But when it's for a hospital system, they matter even more. Grainger gets it and knows there's no time for managing multiple suppliers and no room for shipping delays. That's why Grainger offers millions of products in fast, dependable delivery so you can keep your facility stocked, safe and running smoothly. Call 1-800-GRAINGER click granger.com or just stop by Granger for the ones who get it done. If the world were like a Sleep number mattress, everything would adapt for your comfort. Because as your life changes and your body changes, sleep number mattresses adapt and shift to give you personalized comfort night after night. And now everything's on sale during our Memorial Day event. Save up to $1,200 on mattresses for a limited time to experience a whole new world of comfort. Visit a Sleep number store or go to sleepnumber.com sleep number to a good life sleep. When you manage procurement for multiple facilities, every order matters. But when it's for a hospital system, they matter even more. Grainger gets it and knows there's no time for managing multiple suppliers and no room for shipping delays. That's why Grainger offers millions of products in fast, dependable delivery so you can keep your facility stocked, safe and running smoothly. Call 1-800-GRAINGER Click grainger.com or just stop by Grainger for the ones who get it done.

D (41:49)

Yeah, I think Larry Fink is right on one point, which is he said everything in the financial world will be tokenized. And that's true, right? I mean you can't really deny that. And by the way, you shouldn't care because you know, back in the day before all of us were born, if you bought a share of XYZ company, you had an actual piece of paper. You know, there was a piece of paper, you could put it in a safe deposit box or whatever. You know, at some point we decided that's silly, we should just have, you know, non papered shares and it's held on in your for you at dtc. And all the banks got together, they formed dtc, they made it for this purpose. When that happened, no one cared. You don't care how your stock thing is held? Isn't you just have stock now that your stock is going to trade on a blockchain? Do you care? Should you care? No, it's faster and it's cheaper and so I think that's fine. And so Larry Fink is absolutely correct. That is how and it's happening right now in front of us. You may not realize it because again, you don't care. Their bank's not telling you that, you know, your deposit is going on chain or your. Your BO is going on chain. But it is. And the reason for that is, again, it's faster and it's cheaper, and you can fractionalize these things. The real big, big event for banks here, and the reason they push for it internally is when they do trades with each other between two banks, they're always collateralized. And normally today, without being on chain, what do you collateralize things with? It's got to be cash or it's got to be treasuries. Well, it takes up tier one capital for a bank, which is the most important thing they have, the most expensive thing they have. They hate wrapping it up like that. If they could post other assets, they would love to, but it's too hard to move other assets. But now if it's on chain and it's freely transferable, I can post that up as collateral. And so for them, this is a really big deal. Capital efficiency is the name of the game for them. And that's where real world asset tokenization goes for them. And the same thing actually will play out for people too, which is, you know, take a clunky asset like a private equity fund, you know, buy a private equity fund. Sure. But you got to fill out all these documents, you've got to transfer money in the escrow, you got to get the thing sent back from your. The sub doc back from your lawyer, and then finally your money is tied up into this thing that you can't get a loan against, and you just wait your 7, 10 years, hope you get paid something. And by the way, the minimum investment on that was 5 million bucks. But now I put it on chain, you can buy it for as little as $25, a fractionalized piece of it. I need to post it to the bank as part of my collateral package to get a loan. I can. You know, it's just a wonderful thing to allow kind of clunky assets like that to trade a little more freely and be a little more disparate in the financial system.

C (44:43)

Yeah, it's the. It seems as if that's the natural way that things should move. And that's nothing like what you just said is nothing too different from what we've already experienced. Generally speaking, I think even if you look outside the world of crypto, you see the world trying to do two things right. How can we increase liquidity and how can we remove the barrier to Entry so that more people can get involved, which then contributes to more liquidity. And I think that's one of the biggest strengths here of tokenization. And people always hear these headlines, right? They always hear, oh, it's going to be this multitrillion dollar industry and everyone's always talking about it. But I think it's reassuring to hear it from the mouth of people like yourself, right? Coming from a big four accounting firm and saying, hey, this stuff is actually happening. There's actually interest in this and there's

B (45:29)

benefits, there's real benefits.

C (45:32)

Exactly, Huge benefits. So, yeah, I mean, thanks for, for, for speaking on those benefits. What asset classes do you see tokenization benefiting the most?

D (45:45)

Well, two things. One, on one end of the spectrum, it's currencies, right? Just a dollar or a euro, just to be able to make that move much faster, much cheaper. And also, by the way, do not forget, I mean, we happen to live in a very rich country and we have all of the financial systems prowess at our fingertips all day. Not every country is like that. And so being able to take dollar assets or euro assets and give them to people who are living in countries that don't have the safety of the FDIC around them and letting them use that asset, you know, the democratization of finances is a big thing outside of the United States. So that's happening. But then on the other end of the spectrum, like I said, it's the things that don't trade cleanly, the things that are clunky, like private, private fund interests, clos, securitizations, by the way, even whole bank loans, the way bank, bank loans trade in the United States, there are people who trade in them. They tend to be hedge funds though, in other banks. But you have to buy this entire loan. And by the way, the loan's not by itself, it's in a package of thousand loans. So people, unless you're in that business, you tend not to go near it. But if I tokenize it, everybody can. Everybody can, Everybody can have a piece of a clo if they care to. Everybody can have a piece of a bank loan securitization, you know, by the way, real estate portfolios too. You know, back in the 60s, the United States thought it was a really good idea and it was, by the way, to create something called a reit, which is, you know, a real estate investment trust. And now all of a sudden the everyday person who was trading stocks could also get exposure to actual real estate. But the way REITs work is they come in this basket of mixed up properties that you don't get to pick. Right. You can pick the manager, but you can't pick the actual properties. But now if we say all the properties get tokenized, which they will someday, right, Fine. Now you can buy a little piece of some property out there that you thought was meaningful and you can share in that. And that again, it's democratization of finance. Shouldn't everybody have a little commercial real estate in the portfolio? Portfolio. I actually think that maybe other people don't. But if that's your view, here's a way to express that view without $10 million. And so I think it's, you know, for those type of assets that come in big size and trade, clunky real value and tokenization on those things, totally

B (48:13)

couldn't have said it better. And you know, Apollo is one of the, the groups that is really making inroads into this industry with their tokenization of one of their private credit funds. And you know, I think BlackRock has the Biddle fund, which is a little different, but you know, big Name Asset Managers, $100 billion Asset Managers, trillion dollars. You know, they're stepping into this in a big way and it's really exciting to see. And you know, there is also kind of, you know, one of the other things, and this wasn't on an outline that we, we kind of talked about, but it's just been on CNBC and Bloomberg and all this kind of stuff recently has been this bubble that might be percolating up in private credit. And you know, it kind of ties in here to tokenization because if, if they were all tokenized and had live marks and transparency into what were in all of these private credit funds, maybe there wouldn't be this huge emergence of fear and, and so on. So I don't know if we could get a hot take on anything going on with the private credit bubble. If there is one, again, personal opinion would be appreciated. But I've seen, you know, Blue Owl and Cliff, Cliff Water and some of these other funds have, you know, very alarming levels of redemptions of their capital.

D (49:34)

Yeah. So I wouldn't exactly call it a bubble, but what I would say is that, you know, you, you have investors with different longevity views for their investments. And so typically in private credit, just going back just a few years ago, five years ago, the only people that would get involved in private credit at that scale would have been a private investment manager, like a professional, you know, hedge fund, a private equity fund or an insurance company or, you know, or A pension fund, that's who would invest in that because they have a 10 year, 20 year, 30 year investment outlook. And if things go up and down in the middle, it's okay. They know in the end it's a good asset and it's going to pay. What happened five years ago or so we started to make, you know, what we call retail funds, right. These are 40 ACT vehicles. And so now your everyday American can go buy into these things. And the way we're trying to balance the 40 Act Fund requirements, which there is some liquidity requirement to that, right? And so we say, fine. Every quarter you can Redeem up to 5%, you know. All right, that sounds perfect. All of a sudden it's working for us. Retail people can buy in the private credit. We're off and running. But then you get macro events like what's happening in the world right now and people get a little scared. They say, well, I want to take something off the table. So they put in their redemptions and they hit the 5% cap. Of course they do. Well, you know, if you're going to invest in private credit, you probably should have been looking out a little further than six months. You should be looking out, you know, six years, 12 years, 15 years. So that's why you're seeing this. That's why this is happening. And by the, you know, it's a feature, not a fall. You know, you're hitting the 5% cap. That's why the 5% cap was there. Now you might be right. Maybe we should change the rules around these 40 ACT funds. Maybe that shouldn't be the rule. Maybe there should be some other rule and we can. That's certainly worth thinking about as we go forward. But right now that's what is happening. So it's a little more of a, this creation of these 40 ACT funds, these retail funds that's causing this glitch. That what you see is a glitch, but it's really a feature more than, hey, I have this real problem in the credit market and everything's defaulting. It's not that.

B (51:52)

Yeah, credit spreads still seem to be generally pretty tight across the market. And yeah, it's just kind of an interesting little phenomenon that's going out with the retail folks.

D (52:03)

But, and interestingly, if you had tokenized those funds and you changed the rules a little bit and allowed people to transfer them person to person, well, maybe I wouldn't care so much about the 5% redemption rule. Maybe I could actually transfer it to another person who took a Different view of the market at that moment in time. And maybe that would be the liquidity that would help me. And it can actually be done on chain. And so that's another avenue to look for, look down in the future that maybe we solve it by tokenizing it.

B (52:32)

Yeah, no, actually, yeah. To that point I think I'm, you know, maybe some of these are getting so, you know, sold off and redeemed and all that kind of stuff. Because in the public markets, you know, the software stocks, you know, if you look at igv, right, that's been completely hammered and most of the private credit and stuff, the way I'm learning about it from the public discourse right now is that a lot of these borrowers are, you know, software stocks and stuff like that, or software private companies. And so if they're, if you're looking at the public markets, you're like, oh my God, you know, all the best public stocks are down 25, 30, 40%. Then what about these private companies that are, you know, leveraged borrowers and, you know, all this kind of stuff? Shouldn't they be down? But then you're looking at these marks and they're stale, right? You know, they update them once a year, once a quarter or whatever. And it's, you know, they're, they're checking their own homework in a sense. Of course they have fiduciary obligation. I'm sure they got auditors and all that kind of stuff. But it seems like a little bit of a quagmire maybe about to unfold. Well, look, Tony, while we still have you for a couple minutes, we just want to round out the discussion with kind of an open ended question. Look, is there anything that we didn't ask you that you wanted to highlight? Whether from a firm level, from something that you're studying right now, anything that we didn't ask that maybe we should have, or something that you wanted to highlight?

D (53:58)

You know, one of the things I would highlight though, you know, people love to talk about crypto and you know, my personal view is maybe crypto is here in 10 years, maybe it isn't, but blockchain is definitely here and I love to see what it's doing with traditional assets. You know, think, just if you think about it, yeah, we talk about democratizing some of the aspects about asset management and, you know, being able to own things that maybe you couldn't own before. But also think about, you know, some of the, the things that we could have always done, but we didn't because it was operationally Too difficult. And you know, things like, you know, when you get a, when you get a nice stock that you like, pick your favorite, you know, tech stock, you know, that's got a nice dividend and you believe in it, right. We could have always stripped the dividend rights off of the stock and sold them separately so the dividends would become like a bond almost. And then if you didn't want the dividends, but you love the stock but not the price, well, if I strip the dividends off of it now, the stock's a lot cheaper and you can buy the stock a lot cheaper. We could have always done it, but we don't because it's very operationally difficult then to track everybody who has this, the dividend pieces. But on blockchain I can do it pretty easy, right? And so you're starting to see that out there, things like that. And you know, we're also seeing, you know, I love it, micro finance in emerging markets. Love it, right, Sure. I could have always gone around and given loans between $10 and $150. It's operationally difficult, so I don't do it. But on blockchain all of a sudden I can do it. It's not that bad, you know, So I just love the, the things that this makes capable, you know. And of course you got in the asset management area, you guys might have even seen there's some big, big time asset managers that just started offering what they call vaults, right? But really what it is, right, it's a smart contract run, you know, asset management platform. You dedicate stablecoin to it and it goes off and it's trading under its algorithms. Some of them are curated, so they actually do have a person asset manager back in the background. Some do not, some are fixed algorithms. But I love that. That's the future of asset management. And if you think about that, if you take it just one step further, if I lock people, if I did it per person rather than co mingling funds, well then I wouldn't have a fund at all, right? I'd have a separately managed account, which again I could always do. People do separately manage accounts now, they hate them, but they do them. And the reason they hate them is they're operationally difficult. But if I put it on chain, it becomes a lot easier. Maybe I just do that instead of having commingled funds. So I just love what it opens up to us. The availability of different options that maybe were there but really weren't there before and now I can do them.

B (56:45)

Love it, yeah, it's going to completely make the financial industry much more personal and much more customizable, both for us on the receiving end and for folks who are providing those professional services. So look, Tony, we can't thank you enough for the hour that you spent with us here today on the Crypto 101 podcast. We want to make sure all of our listeners know where to find you, you know, digitally online, of course, after this episode airs. So do you blog anywhere? Do you have any sort of links that you want us to put in the show notes or potentially just kpmg.com and, and send. Start there.

D (57:22)

KPMG.com is great. You can also find every everything I love to talk about, I talk about it on LinkedIn. I have it. So if you follow me on LinkedIn, you know, you'll, you can learn all about taxation of all kinds of digital assets and little fun little things on there. And if you want to call me bad names, I'm also on Twitter and you can, you can yell at me on there if you want to For sure link LinkedIn is a great way to follow me though.

B (57:48)

Awesome. Well, thank you so much. Thank you to KPMG as well. And most importantly, thank you to all of our, our amazing listeners who tune in each and every week to hear from the best and brightest that are on the frontier of digital assets. Look, Tony, thank you and everybody at home watching. We'll see you back same time, same place next week with some more incredible guests. Have a good one.

E (58:24)

If the world were like a Sleep number mattress, everything would adapt for your comfort. Because as your life changes and your body changes, Sleep number mattresses adapt and shift to give you personalized comfort night after night. And now everything's on sale during our Memorial Day event. Save up to $1,200 on mattresses for a limited time to experience a whole new world of comfort. Visit a spiritual sleep number store or go to sleepnumber.com sleep number to a good life sleep. When you manage procurement for multiple facilities, every order matters. But when it's for a hospital system, they matter even more. Grainger gets it and knows there's no time for managing multiple suppliers and no room for shipping delays. That's why Grainger offers millions of products in fast, dependable delivery so you can keep your facility safe, stocked, safe and running smoothly. Call 1-800-GRAINGER click granger.com or just stop by Granger for the ones who get it done. If the world were like a Sleep number mattress, everything would adapt for your comfort because as your life changes and your body changes. Sleep Number Mattresses adapt and shift to give you personalized comfort night after night. And now everything's on sale during our Memorial Day event. Save up to $1,200 on mattresses for a limited time. To experience a whole new world of comfort, visit a Sleep Number store or go to sleepnumber.com sleep number to a good life Sleep.