Blockchain and the Municipal Bond Market -

A discussion with Stephen Winterstein of Alphaledger

Rather than describing it as a product, let me tell you a little bit about how we've evolved as a company and some of the things that we've done in the marketplace, and that will inform listeners about what it is that we're involved in today and where we see this headed.

Were the bond deals public offerings or private placements?

Public offerings. So of course, all the direct purchases were in the loan space and the bond deals that we did were in the public domain. They were very small, but again, the whole purpose of Alphaledger markets is as an incubator and proof of concept.

When I think of blockchain, I think of cryptocurrency. That's kind of where blockchain first came into being. Why is it relevant in the municipal market and how will it make the market better?

The first reaction that I have to question is, that it was a question or a statement that I made prior to my joining the firm, and I've got a lot of clarity around blockchain and cryptocurrency. And I would say that unfortunately, market practitioners, the public at large, tend to conflate those two terms. Blockchain and crypto or cryptocurrency and blockchain, and I think oftentimes in analogies. And so, I would make the analogy that blockchain is the technology just like the worldwide web, the internet is technology. I would say that cryptocurrency is one application of that technology, and if I were to make an analogy, I would say that cryptocurrency could be like a browser.

And AOL is defunct.

And AOL. So, I look at some of the issues that have been capturing headlines regarding cryptocurrency and how folks tend to shy away from blockchain technology, and to me, there's a very similar parallel there to an application on top of the technology. Blockchain is a technology, cryptocurrency is simply one application of that technology. So, if I answer the second part of your question, and that is, so how does it apply to public finance, I think the world is our oyster as market practitioners. Think of blockchain, rather than some flash in the pan widget that people are talking about right now, think of it as a new way of database management. So, I go back to the very fundamentals. We all use databases of one form or another in our companies, and when I think of a database and querying a database, I never ask myself, "Well, I wonder if it's SQL or SAS that I'm working with here?"

Clearing and settlement?

Oh, yeah. In fact, Alphaledger also has a subsidiary we call Alta Alphaledger Transfer Agent, and we think that that's in the offing, clearing and settlement is going to soon be another feature of transactions that occur on blockchain.

I hear people in the world of blockchain talk about tokenization. What is tokenization and what is tokenized debt?

Well, tokenization is simply taking a bond and breaking it down into smaller pieces, and it doesn't have to be broken down into smaller pieces, but that it can be transacted on chain. So, a token is just a representation of something. You could tokenize real estate, you can tokenize anything. It's just familiar with non-fungible tokens of art, and so on and so forth. It's a representation of a real asset that can be transacted in the ether, and that's exactly what the tokenization of securities is.

So, you talked a little bit about the origination transactions that you've been involved in, a few private placements and a couple publicly offered deals. In the private placements, you're a placement agent, whether if they're loans, you're just a consultant or something.

So, we've done no private placements, we've only done loans and public offers. But yes, we could be a private placement, or a placement agent rather, yes.

So, you're working directly with issuers and placing their securities with investors. Should traditional underwriters be worried about this technology? Is this going to disintermediate underwriters?

Well, the short answer is no, but to unpack your question a little further, I would point out that we've only done competitive deals, we've only been in competitive deals, and so we haven't gotten hired as an underwriter to do a negotiated deal where we're working directly with the issuer. A way that we've worked so far is that we've actually gone into the marketplace to both buy side firms and dealers, gotten orders on bonds, a bond deal that's selling, we've had to have the whole deal pre-sold where we have orders on the entire deal from either customers and or dealers, and then we will bid that deal on Ipreo like any other dealer will bid, submitting the bid through Ipreo, typically to the municipal advisor.

Are there any kinds of deals that are better suited than others for this kind of issuance? Deal sizes, credit quality, use of proceeds, type of issuance, type of issuer, anything like that?

Well, I'm not so concerned about credit quality, although I will say that because of the size of deal that we're focused on, because we're a small broker dealer, this is proof of concept and we're just getting started, I would say that we're focused on smaller deals. And the smaller deals may appeal to, for example, SMAs, SMA managers, rather than the large mutual fund complexes, although we're certainly talking to the larger mutual fund complexes as well.

What does ultimate success look like to Alphaledger? Where would you like to see the company five years from now?

I like to think of it in terms of the industry, because I joined the company to solve industry problems, market problems. That's why I joined MarketAxess, and that's why I've joined Alphaledger. I think of it more in terms of can we solve problems. And if we can solve problems, then it means success for the industry. And my hope is, of course, success for the firm and me personally. How I think that looks is, it has to start with vision, and it's something that's hard to translate in our market, vision. Because I think all too often market practitioners are involved in the here and now. They're worried about the trade at hand, they're worried about adjusting their portfolio if they're on the buy side. And to get people to sit back and think about how things could look 18 months, three years, five years down the road, is a challenge. And frankly, that was a challenge of MarketAxess from their very beginnings, including getting municipals ramped up, which they're, from what I understand, doing fabulously now. But I would say it's the same thing here, success means adoption of the technology in the marketplace.

Maybe you don't know, this is a very specific question, but did the record keeping function at FTX hold up during their implosion?

I don't know. I don't know. All I know is what most others know, and that is what I think we saw, the capital accounts that they kept between the two firms, Alameda and FTX, was done on an Excel spreadsheet. So I guess the real question is, did Excel hold up?

What are you worried about? What keeps you up at night?

Well, I think the biggest concern I have is the pace at which new technologies are adopted. And I just touched on that, and that's what keeps me up at night. I don't think we're missing anything on our end of the equation. I think we thoroughly understand the value of managing data in a distributed ledger environment, in a blockchain environment, and we understand, for example, the added benefits of the path that the regulators are probably going to be going down in the not-too-distant future with the Financial Transparency Act, with XBRL if that's the technology that they choose to use. And a lot of practitioners are saying that's probably the path most likely.

Steve Winterstein, it's been a pleasure. Thank you for joining us. I always learn something new when I talk with you.

Thank you, Mike.

And thank you for your continued support of BDA and our activities.

Michael, I love the relationship that we have with the BDA, and thanks for having me today.