In this insightful interview, we delve into the world of Web3 and tokenization with Benedikt Schuppli, founder and CBDO of Obligate. With his extensive expertise and experience as a Chief Legal Officer for one of Switzerland’s first crypto exchanges, Schuppli offers a unique perspective on blockchain technology and its impact on traditional financial systems.
Can you please share your journey to Web3? What was your first project?
I started in the Web3 space around 2016-2017. With Switzerland becoming a hub for Web3, I wanted to explore how we could create a financial system that works better for society in traditional finance that isn’t a priority. I studied law, did my bar exam, and then started working for one of Switzerland’s first crypto exchanges as Chief Legal Officer.
How do you see the current state of Web3 development in Switzerland?
There’s been a lot of progress. We definitely see many advancements compared to where we were a few years ago, but the Swiss space is a bit special because it’s very bifurcated. We have a lot of large protocols and foundations in Switzerland, but the people actually developing and working on these projects are mostly outside of Switzerland. It’s primarily the foundations that are based here.
There aren’t many large Web3 companies in Switzerland. I feel that’s a bit of a pity. The U.S. is still very dominant when it comes to actual businesses in Web3 – not talking about the protocols, but the people building applications around it.
How is tokenization changing the landscape of capital markets?
Tokenization opens up the industry for many new players with much more liquidity. It allows traditional players to engage with the technology and actually use blockchain for purposes other than speculation. So far, crypto has been very speculative. There’s much more we can do with crypto, like actual payments, lending and borrowing, and equity raises.
Thanks to tokenization, virtually the entire breadth of financial use cases and financial services can now become available or accessible through crypto rails.
What are the main advantages of issuing bonds on blockchain networks?
The main advantages of issuing bonds on a blockchain network are the ability to achieve quite a lot of disruption in a more peer-to-peer way with fewer intermediaries, as well as fractionalization. In the traditional world, bonds are issued in a complex setup involving a high number of intermediaries. In the blockchain world, this is different because you can actually do peer-to-peer issuances.
This is facilitated by the law in Switzerland, where we can do something called DLT or ledger-based securities. They have the exact same legal standing as a traditional security, which is issued in a central securities depository and transferred through intermediaries.
Another advantage is fractionalization. We can make lower issuance amounts possible through the disruption and lowering of transaction costs through tokenization. This shapes the use case of the bond.
What role do you think smart contracts play in modernizing traditional financial instruments?
Smart contracts play a huge role because they replace so many intermediaries. A smart contract can assume the role of the issuer agent or the paying agent in traditional finance. It’s really interesting to see that a smart contract can take on this role, going from a financial intermediary providing a financial service to a technology that assumes the same service and role.
Assuming the role of the issuer agent, smart contracts issue the tokens. They distribute coupons, which is traditionally the role of the paying agent. They can also do enforcement of claims and liquidate collateral positions if the issuance is secured and has a margin behind it.
Since there are both public and private blockchains, what are the differences in using them for traditional financial operations and applications?
We are strong believers in public blockchain technology because we think this is where the true value increase stems from. We want to have a financial infrastructure that is owned by the public and not owned and operated by private, highly centralized companies.
For a variety of reasons, traditional financial players often prefer private blockchains. This is why most of the direct applications of blockchain technology we’ve seen in financial services have been on private blockchains, especially in the U.S. Almost no large financial institution in the U.S. has experimented with public blockchain technology, particularly among banks and stock exchanges. We’ve seen asset managers being a bit more open, such as BlackRock, which has done public blockchain interaction.
It’s interesting to note that Swiss law, when creating a legal basis for blockchain-based financial services and instruments like bonds and equities, foresaw public blockchains. They specified that you can only issue an instrument as a ledger-based security if the network is decentralized enough, which is only the case with public blockchains.
What are the main security concerns in the tokenized securities industries? How are they being addressed?
In general, there are fewer security concerns in tokenization use cases than in other use cases. The reason is that these instruments exist outside of pure technology in the legal world. If there’s an issue, like a lost token, there are processes to reissue and nullify pre-existing ones, similar to how we handle lost physical certificates.
However, security concerns do exist. We’ve seen blockchain-based security tokens issued or denominated as stablecoins, and we’ve witnessed the decoupling of stablecoins, which was always a big risk. Other than that, all the general security risks related to blockchain technology also apply to security tokens.
We’re seeing more advancements in standards in terms of security audits and a growing understanding of the risks associated with using blockchain technology. This is very important for bringing more traditional finance on-chain, as traditional financial players want to know how to price the risk.
How does the concept of programmable money apply to tokenized securities?
Programmable money is crucial because for tokenized securities to make sense, we need to have the money side also on-chain. Just having a bond or a stock in the form of a blockchain-based token is only half the solution. To really leverage the benefits, we want to have the money side on-chain as well, because then we can fully do the asset transfer of title against money on-chain using smart contracts. This is where the real efficiency increase comes from.
How is tokenization affecting the accessibility of investment opportunities for retail investors?
Tokenization can create better access to investment opportunities. While tokenization alone doesn’t magically create liquidity or access, it does allow for lower minimum investment requirements. For example, a private equity fund might have a $100,000 minimum ticket size, excluding many investors. Some of the best-performing funds have million-dollar minimum investment requirements.
Tokenization, along with easier subscription processes, can lower these thresholds and make assets accessible in much smaller sizes and amounts. That’s one of the key benefits you can see in this space.
How might central bank digital currencies interact with tokenized securities in the future?
For programmable money, the best thing we have right now is stablecoins, which are usually regulated and backed by fiat currency like Circle’s USDC. However, these are still not 100% equivalent to fiat money.
One of the big solutions would be to have central banks issue money directly on-chain, either for redistribution or, more likely, for wholesale use. This would allow banks involved in the money creation process to distribute central bank digital currency units in the form of tokens to their customer base.
Issuing money directly on-chain will be necessary to further advance the adoption of blockchain technology in institutional finance. Currently, when tier-one financial institutions pilot blockchain technology, the payment side is usually off-chain, which doesn’t make sense. They’re hesitant to use stablecoins, so once we have CBDCs, I think we’ll see a huge jump in the institutional adoption of blockchain technology.
Except for stablecoins, what innovations in the tokenized security space do you think have the potential to disrupt the traditional financial system?
I think it’s definitely the programmability of tokenized securities and the ability to plug into new networks without having to have systems integration. I can issue a token on one platform and list it pretty much anywhere else without needing systems integration. That is incredible. I can do this across jurisdictions, across borders, and across markets. There are some legal restraints, but the potential for disruption is significant.
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