Tokenized Sovereign Debt vs Stablecoins with M1X Global

Joe, so excited for this conversation and dive into sovereign treasury backed collateral for twenty four seven seven. Capital Markets. I love it. Love it. How are you guys doing today? We're excited to be here with you. Absolutely. Maybe, Jordan, since I think we talked last, I'll I'll kick it to you first. Could you maybe frame the relationship and some of the go to market lately of USDM one and and what you guys are building?

We are partnered with The Republic Of The Marshall Islands, which is a former US territory. It's in The Pacific, and we've been banking issues and their payment issues. And they're the issuer of USDM one. It's kind of an instrument that came out of looking to how can the blockchain solve some problems that we have because the financial system left us behind. Is this new financial system something that can be adapted to solve real utility for citizens? And it led to the sovereign kind of embracing blockchain,

creating an instrument that they're distributing to people throughout the whole country. And Jordan, give us the or excuse me. Mark, give us the give us the maybe the story of both of you guys, like how you guys met, where this all started,

and how this came to be. I think the story here is really interesting. Yeah. Well, Jordan and I have known each other for about fifteen years. We started our first companies at the same time. So, we've always had some pataco. And, lo and behold, we both ended up in the crypto space, really cared about figuring out how to use crypto and blockchain to solve real problems. And because there's a lot in DeFi. There's a lot in finance, and there's a lot of issues on Main Street as well.

And so we looked around around for the place where there was the greatest need because usually where the greatest need is where you find demand the most and the willingness to adopt things. And the RMI, Republic Of The Marshall Islands, was really ground zero for a lot of payment and correspondent banking issues. The things that stablecoins really were meant to solve, at least the promise of crypto was meant to solve.

And over the course of a few years, we worked with them to try to figure out how this technology could actually benefit the country. And out of that came USDM 1. There's a lot of reasons why USDM 1 was necessary and other assets, be they tokenized money market funds or stablecoins weren't, but that's something I'm sure we'll get into. Cool. And when

when is the timing of the RMI, the digital sovereign bond? Like, tell us tell us maybe the story of how that came to be. It seems like a really unique hero use case, but, like, maybe not where the story ends. Maybe, Jordan, either of you would love to dive into, like, that specific go to market, the story behind that, and then what maybe some of those learnings were as you as you bring this to market. So so it it really started

with the key problems, right, which is, you know, the the Marshall Islands, just for context, it's a former US territory. It's on the dollar standard. It's halfway between Hawaii and Australia. Everyone they serve in the US military. They're within The US kind of national security perimeter, but they're fully sovereign. And they've always had correspondent banking problems because it's a relatively small market, and so there's been a derisking problem really across the Pacific and island nations.

Meanwhile, these people are spread across, like you know, there's a thousand islands, and they have to travel to go to the bank. Right? And so it's really they move cash around on boats, and there's often cash shortages. So there just was a real problem. And and so a lot of things were tried with the government, you know, and we worked on a lot of various solutions to the problems. And ultimately, a lot of it came down to, you know, the the banks not being able to integrate stablecoins. There's a lot of penalties.

And if the banks can't integrate, then you really have to figure out how to get stablecoins into dollars and out of dollars, and you're right back with the same problem of relying on banking reels. And so really what was necessary was an asset that could be held by banks, and that ended up solving the problem, and that turns out to be sovereign debt because that's what banks are really supposed to hold as reserves, is sovereign debt.

So it's really a journey over two years where we worked with the cabinet, the legislature there, the IMF, the World Bank, US institutions to try to build something that, you know, geopolitically was really robust so that the Marshall Islands could actually issue

this asset, which happened several months ago now. Yeah. You know, this even for people in the stablecoin sphere that are more coming into the space, sovereign debt on chain may feel like a bit of a foreign term. How would you help and easily break down the difference between, you know, stablecoins as they exist with Circle and USDT and issuing sovereign debt on chain? Great question. Stablecoins

are kind of a corporate exposure that is built to mimic, in a lot of cases, the US dollar. So there's corporate instruments, and then there's, like, tokenized money market funds or a share in an investment fund. Sovereign debt is a different role in in kinda global markets. This is one of the first instances of a sovereign issuing their sovereign debt natively on chain using the blockchain as the register. But this isn't a wrapped instrument. It's not a tokenized instrument. It's a direct sovereign issuance.

Because the Marshall Islands is on the dollar standard, it's US dollar denominated sovereign debt. And it's issued in a model called the Brady Bond model, which there's been about a 150,000,000,000 of Brady Bonds issued historically.

It's a pretty robust model that's considered one of the safest possible ways to issue sovereign debt. So this is So you you can kinda think about it you you can kinda think about it as roughly one unit per dollar. Right? Of course, it earns some interest, and and it follows token standards, and it's freely transferable. Right? And it's fully backed by treasuries. Now, you know, the the difference is almost the difference between, like, dollars and and a gift card. Right?

Like, if you have a gift card, that's not that's a private instrument. Right? If the if the issuer goes bankrupt, you just have a gift card. You're kinda stuck. It's only useful in certain ways in certain places. There can be gates. There's bankruptcy. There's all these things. Right? And that's a lot of that that's really what a lot of assets on chain are today. They're corporate wrappers. They're gift cards. If you actually hold the underlying, that's what the the sovereign issuance is.

That's what the global financial system is actually wired and assumed to be based on. That's why US treasuries and sovereign debt is a bigger market than money market funds, money supply, corporate debt, etcetera. I mean, it is the base of the financial system. It's the actual thing.

And so there's just a very big difference from the types of assets we're used to thinking of as like sovereign exposures, but they're actually not sovereign exposures. And Mark, is this just quickly, since we mentioned Brady Bonds, can you speak a little bit to this specifically if I can't verify that this is actually accurate. I'm not a Brady Bond expert, but maybe speak a little bit to this flow here and how it relates. Yeah. So it's let me read this diagram. Fact check it too. Yeah. It's not incorrect.

It's not incorrect, but I think the context is important, which is a Brady Bond is sovereign debt of a country, which is has the credit quality of The US. And how do you do that? Well, a sovereign issues a bond and then collateralize it with US treasuries. And it turns out, you know, that that's what this is. Turns out that's a thing that has existed for a very long time. Lots of countries have done it.

It was actually introduced by The US, US secretary of the treasury, Brady, as a way to help US banks get more liquidity out of the sovereign debt they already held from emerging markets. And so by collateralizing the t bills, it allowed banks to trade it, get it off their balance sheet, access liquidity, and about $10,000,000,000,000 of Brady bonds were were traded. So it's a very established instrument. The vast majority of banks have held Brady bonds in the past.

So it's a structure that's just already has clear regulatory treatment everywhere in the world and sidesteps a lot of the issues that are typically exist with tokenized

assets. One thing I wanna flag from the diagram is I saw on the bottom, it said risk of the fault by the issuing country. No Brady bonds have ever defaulted. So it's actually it's issued these instruments. It's issued under New York law, typically under a waiver of sovereign immunity. And it's used by a wave of regulated intermediaries, including US based qualified custodians, US based trustees.

So the idea is you can have a sovereign issuer who is able to use the currency that they operate in, in this case, the dollar. But you also are facing the risk of The US system. So it can be issued entirely under New York and and under US auspices. So you you have the safety that at the end of the day, the collateral is being held by collateral agent in The US who's following US based legal structures. So interesting. It's kinda like you have dual recourse to two sovereigns, The Marshall Islands and The US.

Can you walk us through then? Like, okay. Great. This is the foundation. This is USDM one. How's it being used today? You know, how are people practically

like, bring us back Got the LaMallo app actually up with the CrossMint announcement. Maybe that that's a good thing to Yeah. Please. Put you on. What what yeah. Would love to, like, said bring us into the moment of, like Yeah. Talk this practically. Talk about how this comes together. Sure.

So the Marshall Islands has a universal basic income independent of this 10% of average annual income. It's it's kind of the most comprehensive universal basic income.

Yep. So The Marshall Islands rolled out its UBI about a quarter and a half ago. They have a twenty year program where every single citizen every quarter can get up to 10% of their annual income, and they can either distribute that through traditional banking, but it's a country where a lot of people are unbanked. They can distribute it through checks, but it's 1,200 islands. A lot of the islands don't actually have banking access. People receive these checks, and it's really hard for them to cash them.

Or they have to wait in line, in a lot of cases, for hours, which means you have to take off work, you have to wait in line for these checks, and a lot of checks don't get picked up. So one of the reasons the country was kind of looking forwards into the future, they said we need to offer an additional we're going to, every single quarter, provide services for our citizens. We need to provide additional distribution rails. We need to use new technology in the most efficient ways that we can.

And in this instance, we use blockchain where distributions can be instantaneous. Every quarter, people can get their digital wallet. They get USDM 1, it solves that problem for them, and it allows people to opt in to whichever distribution mechanism they find most helpful. So in in an area of the world where banking is kind of left because correspondent banking is unprofitable for a lot of the big banks, this allows the government to disperse services to its citizens in a way that is helpful for everyone.

And because it's issued by a sovereign, it's it's a legally secure instrument that's backed one to one by treasuries. You have guaranteed par redemption for a dollar, and every single unit actually has a treasury behind it with a trustee who's holding that treasury. So if you say you want your dollar back, that trustee legally under New York law has to liquidate that treasury, and you get your funds. So it's a big guaranteed par redemption as opposed to, like, a pegged model.

So so the the government has been issuing this. People receive it, transfer it around,

use it in the Marshall Islands. Grocery stores accept it. It is its organic usage is as we always imagined blockchain could help with. Right? And using the Lomolo app, you don't really even realize it's blockchain. Right? It's just a normal user experience, but it's a self custodial wallet. Now it turns out that that same asset is also useful in a lot of other places, in institutional context and other contexts, which is why when you pull up the website, you'll see some of those other use cases.

But today, it's mostly used in The Republic Of The Marshall Islands. Yeah. So we have we have this, the Lomalo app, and then, yeah, the learnings of how this grows into more of the business more broadly. Speak a little bit to to this. Sure. So, again, it's designed to be able to be held by banks. It's a high quality liquid asset. It counts towards regulatory capital requirements under Basel. And so it turns out that's not just useful to banks in the Marshall Islands. It's useful to banks everywhere.

And in particular, it's useful as a collateral instrument. So Anchorage just announced support for USDM one, and a number of other custodians, collateral networks, and whatnot are also starting to take advantage of USDM one to use it in

in their institutional systems. Yeah. Can you dive a bit into this specific announcement? This is awesome. Anchorage is like, you know, the association here is powerful. How did this come to be, and and what is the specific integration unlock for you guys? Jordan, you wanna take that one? Yeah. Around how they're enabling this for institutional flows. But if you look at institutional trading, sovereign debt as collateral is kind of the foundation

of the traditional financial system. Because there's never been a direct sovereign issuance on the blockchain, It's not used as collateral. You have instruments like stablecoins that are used as collateral for trading. But in this case, it's basically a dual recourse sovereign instrument. It's two countries sovereign debt are underlying it, and instruments like that are considered one of the safest instruments in the world for institutional trading.

When you post instruments like that for margin, if you're using an ISDA agreement, for example, if you collateralize a trade with an instrument like USDM one, you can pay a lot less in margin. There's a lot of ways in which Brady bonds were used historically in institutional contexts that this kind of serves a dual purpose of a sovereign helping its own citizens with the blockchain.

It also provides a a instrument that institutional flows can work with and and access, and that allows really, like, capital efficiency at the end of the day. Like, this system is built around sovereign debt as the foundation, and there's a lot of institutional players that they can't interact with instruments that aren't capital efficient. This is a very this is kinda what this system wants to privilege as a collateral instrument because of how safe it is.

And it also means that institutions can interact with it in ways that they might not be able to interact with stablecoins or or other digital assets. Yeah. Yeah. The similarities but differences here are so interesting because, you know, it seems like we're in the same we're in the same building, but we're in different rooms. And these these nuances are really are really, you know, specific to call out, but providing unique advantages. At the end of the day, the issuer defines everything.

So where a stablecoin is a corporate issuer or when you think about, like, a tokenized money market fund, who that issuer The fact that it's a sovereign issuer actually has implications for the instrument. Its capital efficient treatment, how it's held, what it does on balance sheets is pretty dramatically different even if it's form factors. It's similar. Yeah. On the side, says stable coins are unsecured.

I'm gonna pop this up. I think this is speaking to exactly what you're what you're talking about there, Jordan. Go ahead, Mark. Well, I just I just wanna underscore that because this seems like a nuance. Right? But it is not a nuance.

So if you think about it, you know, crypto trading didn't really take off until there were stablecoins on chain. Why? Because traders couldn't trade unless they could go risk off and flip into a dollar denominated asset and then go on until into, you know, BTC or or ETH. Right? And so you didn't see trading really take off until there were stablecoins. Similarly, things like, you know, treasuries don't really wanna be kept on chain unless they can earn some yields. Right?

And so until there's stuff like tokenized money markets, they're not really gonna come on chain in a real way. Right? And in the same way, institutional flows, they'll pilot on chain, but they are not coming on chain until they can do so with assets that provide capital efficiency on their balance sheet based on regulations that force them to value assets in certain ways. And so the lack of assets like this, sovereign assets, it's not a subtle thing.

It is actually what's preventing the next wave of institutional adoption. Right? And that's why it's so important. Today, it's like we're it's like, you know, ten years ago when people could flip between cryptos, but they couldn't get into a dollar denominated asset if they were risk off. It just holds back the whole space. And if we look forward another couple years and look back at this conversation in time, we'll realize, oh, this actually was the thing that unlocked pilots

to production. Yeah. I'm looking at the use cases here. You have banks, prime brokerages, OTC desks. Speak a little bit about what this unlocks for these types of of companies. Are are you familiar with Netting? Netting. No. Say more on that. Okay. So this is sometimes maybe something we're more familiar with is is cross margin across oftentimes, let's say you have a perk. Jordan, we're tapping you in again. Yeah.

My Yeah.

Try it one more time. I will bring you back. You were speaking about netting. Go ahead. Here. I know I know the problem. We're resolved now. Keeps hooking up to my phone. Yes. Was wondering were taking me to school on what netting is. Start at the start. Okay. Alright. Netting one zero one. So we often know this is cross margin or cross collateralization in crypto. Right? So let's say you're at a purpose exchange. You're have two positions.

One's long, one's short, and you're kind of it's a 1,000,000 long and a 2,000,000 short. So you're 1,000,000 out of the money. Does that make sense so far? Yep. Okay. So you only have to post 1,000,000 collateral, not 2,000,000 collateral. Right? Okay. You've netted. Now we do this in crypto, but it's actually not legally enforceable at all. Right?

Because what happens is if your counterparty goes bankrupt, the bankruptcy court freezes those trades, and then you have to pay the one you're out of the money on, but you don't get to collect the one you're in the money on. They cherry pick. This is what happened with Lehman Brothers and why there was systematic risk in the financial system. Right? So when a major counterparty goes bankrupt, all the netting breaks down. The bankruptcy court splits them individual exposures.

So in the case where it really matters, we're all in crypto. We're all in in a big bit of trouble. Right? And so, you know, maybe we just accept that in crypto, but regulated firms are not per Looks like MetaFurse again. In order to trade in crypto as an institution. Right? And so as a result, they don't. And that's a big thing holding things back. Now if you can net, you probably reduce the collateral you need 90%. Right. And and and that's how it works in the traditional financial system.

And it turns out you only get netting allowances

for certain assets. And So you you guys have you guys have here a huge net that you're casting, which, you know, given what you've said makes sense. Who who do you feel like is gonna be you know, you have banks and brokerages, OTC desks, market makers, hedge funds, asset managers, and more. Who who are you if you could pick one to three of these to start with in terms of who is feeling this pain the most, who needs this the most, who are you talking with the most, How are you trying to prioritize that list first?

Or or is that the wrong approach in your opinion? No. I'd say OTC desks and prime brokers and people looking at institutional derivatives.

That netting in the context of institutional derivatives, particularly under ISDA, which is basically the contract that the majority of the world's global derivatives flows are in. Derivatives is a $700,000,000,000,000 market. Netting is the dynamic that eliminates tens of trillions of dollars of risk every year. So you're able to basically the same unit of risk, you can put on far more trades if an instrument is netable.

And the reason is the system basically pushes pushes firms to use collateral that's considered some of the safest collateral in the world, that is the most legal certainty, that in times of crisis and stress, these forms of collateral have performed the best historically. So US damn one, because it's structured and because it's structured as a Brady bond under New York law, so its closeout netting treatment is under New York law, which is some of the strongest netting treatment in the world.

When you use an instrument like this institutionally, you can pay less margin on trades. It winds up that the system requires less collateral from you because you're using really safe collateral. So this opens the door. If there's firms that are operating under ISIS, trading gets cheaper because it's a better form of collateral, which then brings more firms into the crypto landscape because they've never had an instrument that looked like this before.

A lot of people feel like stablecoins are net of instruments, But the reality is you can get them operationally. You can't actually net them legally. And that's seems like a trivial point. If you talk to anyone on a legal team or you talk to anyone on a risk team, being legally netable actually has incredible implications in terms of the pricing of trades. So traders might not realize that that's an underlying mechanic.

They see the price of the trade on that screen, but the price of the trade changes materially if you're using collateral that's net. And the the structure, sovereign assets structured in a particular way are netable. It made sense for the Marshall Islands to structure this instrument in that way for kind of the good and the safety of its own citizen. But in the institutional landscape, it also provides a a new kind of primitive for derivatives trading.

And if if you get crypto and derivatives trading, spot the size of the spot market to the derivative market is roughly one to one. That's out of whack with how derivatives trading markets look in traditional financial markets by a significant multiple. Like a massive multiple. Right? Like x or something around there? A lot of people in crypto have had a lot of conversations about why does it look like this. This is a distortion.

I think if you've looked back, netting is one of the core primitives that allows derivative markets to scale. It's been missing from crypto markets. Instruments like this introduce it into crypto markets, and it it allows you to put on far more trades. It allows you to grow volume without leverage. So it's an interesting new dynamic that this instrument can provide. 100%.

Well, cool, guys. We gotta wrap here. I guess my last question would be when you're thinking about the specific individual I know, Jordan, we've we've talked about this before. The buyer or the person at these firms, at these OTC desks and market makers and more that you are typically talking to, who are those types of people? Who are you trying to have conversations with? Who's that, you know, internal champion or people on the other side of the desk that are most excited about what something like USDM one unlocks?

Who's that? Like, what kind of person is that, and what type of role are they in? What's the invitation look like for them? I'd say legal teams, pretty bonds are instruments that have been accepted by institutional firms all over the world for the past forty years. I said earlier, there's a $150,000,000,000

of pretty bonds issued. There's actually been 10,000,000,000,000 of them used in secondary trading. Institutional firms are familiar with this instrument. They know how to onboard the instrument. They have legal certainty as to the rights and protections of holders, which is something in crypto markets is missing. So that legal certainty, I think lawyers get excited, the risk modelers get really excited, and then that turns into you can put on more trades per unit balance sheet.

So if an institutional trader, you have a fixed net balance sheet to be working with, you can put on optimal volume safely, and that turns into more profitability. It allows you to have tighter pricing for clients using using better forms of margin assets, make the whole system work better.

Incredible. Mark, any last thoughts? Yeah. I just wanted the last thought that the institutional use cases are intriguing and exciting because they are major unlocks. But really but really USDM one enables the people of the Marshall Islands to actually participate in the global financial system. Right? It enables real people to do real things, which it is really hard for them to do today. Now they may use stablecoins, but stablecoins aren't enough because you need to get money in and out of countries.

You need to have things that can be held by banks. You need to have collateral, and those can enable stablecoins. But you can't use stablecoins in everyday life unless you have these things that underlie the financial system, right, and connect countries to each other. And so that's what we're really excited that the Marshall why we're really excited to work with the Marshall Islands, that the Marshall Islands has done this. Right?

Because what they built to help their own citizens turns out to be exactly the kind of substrate and and layer that is required

to help a lot of other people and a lot of other places use blockchain and crypto like we all want them to use. And and we're just excited that this gets to be the missing piece. Yeah. Excited to keep following the journey. Excited to keep seeing more of these partnerships like Anchorage come to life. Incredible progress so far, and congrats on that one. Keep us posted on the progress, and we'll have you guys back on. It's been fun. Thanks for coming on, guys.