Tokenized equities will dwarf stablecoins, says Kraken co-CEO Arjun Sethi

While stablecoins have clearly found one of the strongest product-market fits in crypto, tokenized equities will become far larger, according to Kraken co-CEO Arjun Sethi. 

"How do we start thinking about new structured products leveraging crypto liquidity rails? Stablecoins are one of those," said Sethi, in an interview with The Block. "But imagine what stablecoins have done so far. We've got thousands of new products that are going to be equivalent or larger than that."

"One tokenized equity is going to be equivalent or larger than Tether," he added. "Now you can have fifty, five hundred, a thousand of those tokenized equities — then you do futures and options trading on top of that.... The market is just going to get that much bigger, that much larger, that much faster than what we're used to.”"

Sethi said that he’s positive about tokenized equities not just because of their transparency, speed and 24/7 trading ability but also because they are potentially easier to access worldwide. He mentioned that in the UK and in Europe there isn't the same access to traditional style American products.

"By the time you want to get access to a financial product that we're used to in the U.S. without friction, you're bludgeoned along the way where you're like, 'I don't really want to do it,'" he said.

A key part of this plan is Kraken’s newly launched Ethereum Layer 2 network, Ink. Sethi said that the exchange isn’t planned for every company in the world to build on its network, but is concentrating on connecting traditional finance with decentralized finance (DeFi). In a first step, Apollo Global Management, one of the world's largest financial firms, and Securitize are  providing tokenized access to the Apollo Diversified Credit Fund on a few blockchains, including Ink.

“If you want to get access to an 11% product with a thousand bucks, we're going to enable that,” Sethi said. “If you want to have access to banking and financial services through your bank, but you don't want to use Kraken, we're going to be able to enable that. If you want to be able to use collateral through tokenized equities or commodities in the future, or a unified balance structure to be able to borrow, we are going to enable that too.”

In a similar vein, Kraken rolled out its own version of tokenized Bitcoin last October to provide another way to bring it into DeFi. Initially launched on Ethereum and Layer 2 network Optimism, it recently became available on Ink. Sethi said Kraken’s move was to reduce friction for clients wanting to enter different parts of the crypto market outside its exchange. 

It’s an increasingly competitive space. In January, rival exchange Coinbase started offering Bitcoin-backed loans through a partnership with DeFi lending platform Morpho, helping it hit a peak of $4 billion of total value locked in the protocol.

When asked if this combination of traditional finance and crypto made Robinhood the main competitor to Kraken, Sethi argued that everyone competes with each other. He said these companies provide banking services and custody services, plus access to investments and products. 

“So you can't think of this as just an exchange layer, it's like a technology layer with an exchange that's got a trade engine that's got liquidity and you can build a multitude of applications on top of it,” he said. “So we look more and more akin to another technology company that's enabling a massive ecosystem to be adapted. We don't have to own it.”

As for whether Kraken will go public, he noted the exchange released its financials at the end of January and will continue to do so each quarter, as part of a greater transparency push.

“If it makes sense for us to go public at a certain point over the course of the years, we will on behalf of the clients, not because we need it.”