Fireside Chat: An Interview with BNY's Carolyn Weinberg

The Future of Financial Market Infrastructure

Global financial markets are currently at an inflection point. Capital markets are moving faster towards an always-on operating model and at the same time, digital assets and blockchain technology are becoming mainstream. The discussion delves into the forces driving the future of financial market infrastructure.

Transcription: 
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.

Holly Sraeel (00:08):
I am very delighted today to have Carolyn Weinberg with me. She's Chief Product and Innovation Officer at BNY. We are all about digital assets, blockchain and financial infrastructure today. So let's get started. Digital assets, blockchain, and on-chain finance are unquestionably the next big thing in the financial industry, but getting from here to there will take some serious work. Notably on financial infrastructure. From your perspective, how do you define the future of financial market infrastructure? And why don't we talk about the key components of it?

Carolyn Weinberg (00:43):
Amazing. Well, first, thank you so much for having me. I'm thrilled to be here. Maybe we'll start with what is a digital asset because one of the key ways that we're going to get there is that everyone understands what we're talking about. Sometimes I'll say I'm trying to transform financial markets and financial infrastructure with blockchain, and people will say, "Oh, you invest in Bitcoin."

Holly Sraeel (01:05):
Yeah.

Carolyn Weinberg (01:06):
Which is not actually what I'm doing. So maybe we'll start with just level setting. What is a digital asset? And when we talk about digital assets, what is the framework for thinking about this? First is infrastructure: distributed ledger technology, DLT, or blockchain is very much the core of what we're talking about and everything builds from that. When we think about how you record transactions or data in this way, it's on a distributed ledger. So we start with an always-on, immutable, programmable blockchain or distributed ledger. That's where we store all of the information and transactions taking place. Once you have this concept of a distributed ledger or blockchain, you can do things on it. What are things you can do? You can have a stablecoin, you can have tokenization. You can say, "I'm going to represent this water or this security or something on the chain." By entering it onto the chain, you tokenized it.

(02:06):
It sounds super fancy, but actually the old version of that was data input. The new version of data input is putting it on chain or tokenizing. Lastly, we talk about cryptocurrencies, like Bitcoin or ETH; that's the currency by which you transact on that particular blockchain. When a transaction takes place, people get together and say, "That was a transaction that's validated. That's correct." When you do that, you get paid essentially in the currency of that chain. Those are the four big boxes that we think about: distributed ledger, stablecoins, tokenization, and cryptocurrencies. When we think about infrastructure, it's not as if the whole world is changing, all of the computers we have are going to change, and we're going to have a whole different mechanism of transacting.

(03:07):
It's really that the blockchain in concert with our traditional ways of doing business are going to transform how we do business for the future. The blockchain is always on, whereas most of our systems shut down, they have batch processing, and we all go to bed at night. This concept of twenty-four-seven doesn't really exist in the way we work today, but blockchain enables that. Together, it will enable this future estate where we can have twenty-four-seven always-on immutable record keeping.

Holly Sraeel (03:40):
So in practical terms, talk to us about modernization. It means faster settlement, new asset types, new rails, but what else does it mean?

Carolyn Weinberg (03:48):
When we think about what are possibilities for the future, very simply, you have the concept that you need to make a payment. When we think about making payments today, most of us use our phones, sometimes we'll use Venmo, we'll make instantaneous payments, but sometimes we still have to write a check. My children's piano teacher still requires checks, which I find challenging, but it still happens. In that future state, it's going to be the combination of this twenty-four-seven of payments. Payments take place in the form of a stablecoin, tokenized money market funds, or moving treasuries around like collateral. Today, when you make a payment in the financial markets, often you're using treasuries for collateral, and then tokenized deposits as an example. One of the future states is this concept of a payment twenty-four-seven.

(04:40):
This enables money to move around and mobilize. The second piece is really about mobilizing other assets, whether they are securities. We are recording that actual security on the blockchain so then you can move it twenty-four-seven, or you can actually mobilize real-world assets. People talk a lot about, "I'm going to tokenize that building." Maybe that will happen. It doesn't mean it's going to be a liquid building, but it does enable you to start to create shares that people can actually transact or trade in. Just because you've tokenized something, it doesn't mean it's liquid and everyone's trading it; it just means that you've now recorded it in a way that is possible for things to happen. Then you're going always to have these more native types of securities, like a cryptocurrency, or countries issuing bonds that are native to the blockchain.

(05:36):
So they only live there. To be clear, I talked about payments, which is tokenizing forms of money. Secondly is the things that you're buying, like securities or buildings. Thirdly, there are things that only exist on the chain, like Bitcoin or a native bond issuance.

Holly Sraeel (06:01):
So you're in the thick of this every day. How has your perspective on blockchain and on-chain finance evolved in the last few years? What's our current reality?

Carolyn Weinberg (06:11):
What's really entertaining and fun is that blockchain and these conversations are much more mainstream today. If you go back three or five years—I studied applied math in college and I took a crypto class on cryptography, like code breaking—I just thought, okay, this is interesting from a math perspective. But cryptography and blockchain were, in fairness, like a bunch of math nerds in the corner. Now it's a real conversation and it's not actually just a bunch of people imagining what you could do with this technology. It's mainstream. There is regulation that is looking at it and providing frameworks and guardrails. There is true adoption from banks and large institutions around tokenization from a securities and payments perspective, and real use cases.

(07:11):
The big differences are that when we would talk about what's possible in the past, ultimately what we talk about is cryptography. It's keys; you're holding keys to unlock the data inside. As a kid, we used to like A equals C and you make up a code. The key to that code is the same thing in cryptography and blockchain. There is a code that you store. When someone says, "I'm storing my Bitcoin on the blockchain," they're actually storing the keys to unlock that Bitcoin. Just to be clear, it's not actually the Bitcoin itself. The concept of those keys moving around, being stored or shared, is now much more mainstream.

(08:04):
We all probably have used blockchain and didn't even realize it. Maybe some of you invested in different elements of cryptocurrencies or used a stablecoin, but it's so mainstream and so normal, which is really quite exciting.

Holly Sraeel (08:18):
You're such a math nerd. Oh my God. Look how excited you are. It's true. I get excited about things, but I'm not sure I can get excited by private keys. I'm teasing because we do have a major new community that I'm happy to announce we are building: American Banker on Chain, March 19-20. So I'm equally excited. Okay, let's keep going. As chief product and innovation officer, where do you see the most promising opportunities to rebuild or reimagine core market infrastructure?

Carolyn Weinberg (08:53):
So we start with payments. There are so many rails today that work well. What's exciting is that having an always-on blockchain—which enables stablecoins, tokenized money market funds, treasuries, or deposits—actually pushes traditional rails to also move faster at the same time. It's not about one or the other, but the combination of the two. When you have this ability to make payments faster, you actually just could have the Fed be open longer, too. There are elements that are really fun as you start to imagine the future in finance and how the blockchain enables traditional systems to move faster or enable global settlements in a more specific way. I think one of the biggest opportunities I see is payments from the blockchain perspective alongside traditional systems moving faster.

(09:57):
Why is that relevant? Imagine a world where if you're a company and you have businesses all around the world, in order to make payments for payroll, you probably need accounts in those countries, a revolver, and a whole bunch of facilities that go alongside it. There is probably capital locked to run the businesses around the world. But imagine a world where you can instantaneously move the money; actually, you don't need all of these facilities. All of a sudden your capital and your efficiencies of using cash improve. In another world, think about the sales and trading environment or the central clearing of derivatives. In theory, if you do a trade on a Friday, it doesn't settle possibly until Monday and the market moves a ton.

(10:54):
That's really stressful if you are expecting to get that security or that cash. But if I could settle it immediately, maybe there's a lower risk premium on that because you know it's settling. There's a certainty of settlement. As a result, you start to imagine a world where your collateral can move the same day, which means you have less risk in the system, pricing should improve, and your margining should be lower. You have this concept that you know you've settled it. When one thinks about where there's risk in systems, it's about leverage. If you don't actually get that cash, you didn't actually trade what you thought you traded because there are failed settlements, you start to have an issue and a daisy chain effect.

(11:42):
Ultimately, all of these elements of moving payments faster have real benefits, but those who don't need the money faster actually are not going to do this. It's not like the whole world moves faster. When I move my money from my Venmo into my bank account, I wait three to five days because I don't need the money immediately. But if I needed it, I would pay whatever fee they charge. That's just how the world works.

Holly Sraeel (12:08):
Okay. So let's talk a little bit about how you approach the design of new products that can operate seamlessly across both traditional and on-chain environments.

Carolyn Weinberg (12:18):
There always has to be a use case. Why would you transform or make changes to a system if it works really well? When you think about innovation at BNY, we are the largest custodian. We make trillions of dollars of payments every day. We touch 20% of all securities transacted. We are the largest collateral manager and we do lots of security lending. When you think about all of these things, they work well, but we could also imagine a world where if we applied blockchain, we would have faster, better, more efficient systems for some of our clients who may need things moving faster. Innovation is about which clients need what and why, using the scale, trust, expertise, and regulatory oversight to start a transformation where traditional works in concert with this new system.

(13:27):
Innovation comes from having a deep knowledge of where client needs are and where value is created, doing it with a deep understanding of all the intricacies because the financial market is built on trust. If there's not trust in the system, then we have a problem. Therefore you need to start with what works, what do we need, and how do you use that expertise to enable better markets for clients?

Holly Sraeel (13:57):
Which is a perfect lead into my next question. What's the hardest part about building institutional-grade infrastructure around digital assets? Is it technology, governance, or trust?

Carolyn Weinberg (14:07):
I think it's all three. You need to have good technology. You need to be able to govern it appropriately, and you also need the trust of your client and the trust of the system. Interoperability is really a critical piece. If one does not believe that the technology or the governance of that product is sound, you're not going to have trust and the ability to interoperate to have a whole financial system that works. All three of those are critical to really functioning markets.

Holly Sraeel (14:43):
When you think about product innovation and financial markets, what principles guide you, especially when the technology is still maturing?

Carolyn Weinberg (14:54):
We always start with the client. What are the needs of our clients and how do we enable them to grow? How do we use technology in a safe way, well governed and with trust, to further the needs of our clients? In this world today, an always-on model is really important. As we're seeing the world go more global, you actually do need to have a twenty-four-seven operating model so that clients in Asia who are trading treasuries can do so either in a T plus one or T0 way. It's very hard given the windows of time for them to do that. If we're going to have global asset classes, we do need this always-on model.

(15:40):
You also need interoperability. If you transact in something, it needs to go back into the systems that have everything else. We can always think about imagining a world over here, but it needs to connect to the real world. For me, success in innovation is about that interoperability alongside this always-on element. Lastly, from a principles perspective, having clients that we can test with is really important. You want to think of something as a beta and test specific use cases in a smaller, safe way. From there, you can scale and enable entire ecosystems, but you don't start with giant scale. You start with trust and specificity to then scale and transform.

Holly Sraeel (16:50):
So moving along, let's talk about tokenization. How do you view the role of tokenization in expanding market access and liquidity?

Carolyn Weinberg (16:58):
Just as a reminder, tokenization is about recording something on a blockchain. Whether we call it a tokenized money market fund—where we represent an existing fund on a blockchain—or a building that someone has tokenized, there is a lot of things you could tokenize. But why would you ever do that? I said at BNY, we have 57 trillion of assets in custody on behalf of our clients. Imagine we were able to put the books and records of all of those assets on a private chain at BNY that's always on.

(17:53):
All of a sudden, the ability to mobilize that on a weekend at any time is pretty remarkable. As I mentioned, we touch 20% of securities trading every single day. If you can imagine a world where one could instantaneously transact—and if you take the concept that a blockchain is programmable—you can say with an AI brain that the cash is sitting here and that security is definitely sitting there. This is 100% going to settle. I could do that on a Saturday. The ability to mobilize assets and optimize your cash and transactions is unbelievable. The ability to make the world smaller, create optimizations of balance sheet, is really amazing, but hopefully we don't all have to work weekends.

Holly Sraeel (19:04):
Before we move along, let me ask you a follow-up. How far off are we from that world?

Carolyn Weinberg (19:10):
I think a lot of this is possible. At the same time, doing it in the right, safe, secure way is not yet there at scale. We are still in beta phases or in specific asset classes. We hear a lot about tokenization of deposits, treasuries, stablecoins, or money market funds. We've been very focused on that as well. These are well tested at this point, and those are pretty great rails for transactions. The concept of putting all 60 trillion of assets at BNY on an internal blockchain may happen in the future, but the ability to make payments on a blockchain exists today.

Holly Sraeel (20:04):
Which asset classes—debt, funds, deposits, or real-world assets—are ripest for tokenization at scale right now?

Carolyn Weinberg (20:15):
I think the payment rails are really critical. Tokenized money market funds, deposits, stablecoins, and treasuries are really ripe for the space. The use cases for those are payments and collateral uses. We're also seeing more and more of this concept of tokenized funds. You could pretend like the world has people sitting on a blockchain and people not sitting on a blockchain. There have been a lot of people from an investment management perspective who have made money on Bitcoin or other cryptocurrencies. People who have made their money or are investing on the blockchain don't usually go back out to traditional funds.

(21:13):
It used to be that your choices were making money on Bitcoin or a stablecoin, and stablecoin has zero yield. You can have a really risky asset on one hand or an asset with no yield; there's nothing in between. The whole portfolio concept doesn't exist in that world. So what you're seeing is the money market fund as a stable nav; it's a payment rail, but also has some yield. There's this gap in between. What we're seeing ripe for development is that next wave: tokenized funds or tokenized indexes to make investments that look somewhere in between zero yield and Bitcoin.

Holly Sraeel (22:15):
So, medium risk.

Carolyn Weinberg (22:17):
Medium risk or the ability to invest in a way that is more custom. I would say the next phase will probably be more the ability to actually create custom indices and investment guidelines for someone. Again, if you can have programmable equities and bonds tokenized, all of a sudden you can create your own portfolios and it's pretty interesting.

Holly Sraeel (22:45):
How do you balance experimentation with compliance when building products that touch tokenized assets or blockchain rails?

Carolyn Weinberg (22:52):
Everything has to be done with full compliance, governance, regulatory oversight, and a framework that works. We are regulated by many. Everything has to be done within that framework; that's what drives trust and fairness. I would want to work with BNY in part because we are so regulated and so compliant focused. At the same time, there's a lot of room within that governance structure to transform markets. We are leading much of this from a custody, payments, and data perspective. We're putting data on chain now. We are big providers of the navs of funds and we can now deliver that on chain, which changes the way you are able to pull in data on your investments.

(23:55):
All of these things are in that regulatory and compliance framework, but you can easily scale within that, especially if you do it with clients and you start to build use cases and test in a beta way.

Holly Sraeel (24:09):
Is there a situation where you worry that the regulatory framework might loosen, which would not be good?

Carolyn Weinberg (24:20):
I think there's a balance between enabling innovation for the good of all versus over-regulation.

(24:37):
It is really hard for the regulators because the technology and the use cases move fast. I think the partnership with regulators is actually really important; the ability to be transparent about where the world is going and the important role that regulators have. We want to be forward-thinking and leveraging all the great technology that's out there. At the same time, without a great regulatory framework, it's really tricky to innovate. You want those safeguards of clarity, but with room to innovate.

Holly Sraeel (25:33):
Let's talk next generation of clearing, settlement, and custody. What will that look like when it's powered by distributed ledger technology?

Carolyn Weinberg (25:41):
A lot of people think about pre-trade liquidity. But when you think about blockchain and settlement, the post-trade—what happens after you do the trade—is where BNY is. Someone said, "Oh, you guys are like the plumbers." I think we are. What happens after a trade is actually super exciting. It's those details that matter to enable the settlement of a transaction, which is what's critical in any financial market for trust to happen.

(26:32):
One of the most important things that's going to transform markets is that you know someone has cash, you know someone has that security, and the ability to make sure that is going to settle when you think it's going to settle contractually. I would say the post-trade world is going to be enlightened. We use AI and have a high sense of what is the probability of something settling today, but the ability to leverage smart technologies around blockchain makes it even greater. We can be more clever with our clients around whether they want to settle T0 or T1.

(27:18):
Further, I think that the ability for traders who know the post-trade possibilities will change their ability to price. Collateral markets will get more efficient and cheaper. Markets are going to become more efficient and risk-reducing, though obviously new risks get introduced with new technologies as well.

Holly Sraeel (27:51):
How important is interoperability between chains, networks, and traditional systems?

Carolyn Weinberg (28:03):
If BNY were the whole world, we wouldn't need interoperability because everything would just work, but that's not how the world is. You need to enable the movements between BNY and somewhere else. Similarly, people are buying a stock through the New York Stock Exchange and that needs to connect in with what's happening. The ability to interoperate between countries, systems, and different blockchains is critical. What's also important is that we don't create different marketplaces that don't talk to each other because then you're just fragmenting the market.

(29:00):
What's important is to build everything from an interoperable perspective. We obsess over how to enable the interoperability of all of our clients, all the systems they use, and all the blockchains being built. Take a stablecoin, which I think is a really nice interoperable layer.

(29:32):
A stablecoin is something that's always worth a stable value. If you looked into USDC, you have investment management that looks like a money market fund, the custody of those treasuries and cash, and a deposit layer inside. If someone wants to say, "I'm going to buy stablecoin," a payment comes in of a dollar, it gets invested in that money market fund, the treasury gets stored in the custodial accounts, and then a token is issued. At BNY, we can do all of those things: tokenize, submint and burn, invest the money, make payments, and hold the cash reserves.

(30:27):
We are not a stablecoin provider, but we want to enable all of that. In theory, you can just move the treasuries from one to another and you don't even have to have market impact. Another way of interoperability is a client says, "We have treasuries. Can we give you those treasuries? You give us a stablecoin and I'm using it to buy something somewhere else." Stablecoins have this mechanism to be the payment layer between all these different banks or systems. As the reserve custodian for many stablecoins, we feel like we're a key interoperable layer between the coins and the securities.

(31:26):
Enabling that to connect with everyone else's systems is what's going to drive further scale and adoption.

Holly Sraeel (31:39):
In the interest of time, I want to power through. What types of partnerships are most valuable now: technology providers, exchanges, fintechs, or even competitors for BNY?

Carolyn Weinberg (31:53):
Partnerships are critical. All of the above are critical partners. The mentality of "grow together" is how I think of partnership. You can view people as a competitor or you can say, "This is a new market. Let's grow together." If you take the mentality that we're building an ecosystem and we would love you to do well and we would love to do well, that actually is a very positive way to drive an ecosystem. There are competitors who don't want to work with you, which makes me sad, but most are happy to because our view is that together we can build an ecosystem and if we grow a market, we all grow.

(32:51):
Partnership is about all of the pieces. I think about the flywheel a lot: what are the things that need to happen in order to make the whole system become self-fulfilling and grow? You need a whole ecosystem to make that work.

Holly Sraeel (33:20):
How do you see the balance of power shifting between banks, fintechs, and DeFi players?

Carolyn Weinberg (33:28):
There is a tension at the moment between fintechs, banks, and the system because access to the Fed Master account is a conversation. That interplay of who's powering who is really important for our financial markets. I think the Clarity Act is going to be important. I also think the regulatory oversight of fintechs who may have access at some point will be important. But at the moment we all work very closely together and we enable so much of that fintech and DeFi world. It all is very harmonious. I do think more regulatory clarity on some of these big topics is going to be really important for trust in the system.

Holly Sraeel (34:43):
Final question. How do you envision digital assets evolving over the next five years?

Carolyn Weinberg (34:52):
I think just like it went from very niche to mainstream, it's going to just be normal course. What's going to be more exciting is the layering in of AI. In five years, you'll see much more programmable optimizations and the ability to really drive new use cases. Smart technology or smart contracts is amazing. The combination of AI plus smart contracting that can say, "We've done this trade and this is what's happened on a blockchain" is remarkable. As this gets more scale, I think we're going to see that interplay happen more and a financial system that is much more fluid.

(36:02):
People will not actually imagine non-settlement or non-payment and will have much more clarity on payments, custody, the mobilization of assets, and interoperability. It'll be pretty normal. I don't think it replaces traditional systems; it's really in concert. I still write checks for my kid's piano teacher. There will still be check writing and traditional systems, and they work well. We shouldn't ignore those systems. It's just that when you run alongside a blockchain, it leads to more efficient processes and better results for clients.

Holly Sraeel (36:44):
We're out of time. I'm sure you can grab Carolyn if you have questions, but I'd like everyone to join me in thanking our math geek extraordinaire, Carolyn Weinberg, for sharing her vision.