Episode #35: Colin Butler — Global Head of Institutional Capital at Polygon Labs

Episode #35: Colin Butler — Global Head of Institutional Capital at Polygon Labs

Last updated:
April 4, 2023
Total length::
34 min
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Cryptocurrency, Crypto
DeFi, CeFi, TradFi
DigitalAssets

Colin Butler, Head of Institutional Capital at Polygon Labs, goal is to push the boundaries of traditional mindsets. He sees live Tokenisation as a world-changing phenomenon that will democratise assets and investment vehicles. Polygon developers are creating on-ramps to bring new technologies to the individual. He promises NOW is the time.

Walter Jennings: Imagine you're driving down a highway in a taxi, there's a load of traffic, and the metre is clocking up, you're getting somewhere slowly and it's costing you. Then you see another taxi fly by in another lane, you switch on and recognize they're gonna get to their destination faster and cheaper. The highway you're on is Ethereum and the Fast Lane. Well, that's Polygon. Our guest today is Colin Butler at Polygon Labs. His goal is to push the boundaries of traditional mindsets. So let's see if he pushes our perceptions of what Polygon has to offer. Welcome to the Finoverse, Colin Butler, thank you for being here.

Colin Butler: Thank you, Walter. It's a pleasure to be here.

Walter Jennings: Yeah. Now, you had mentioned at the outset earlier that you could talk all day about tokenization and institutional defi. That sounds a promise to a podcast host.

Colin Butler: I lied to you. I think I could probably talk about it for years. I could talk for an indefinite period of time of these topics, because I spent 24 7 focused on tokenization and institutional defi.

Walter Jennings: Well, listen, I do wanna dive straight into the tokenization aspect because here in Hong Kong, we've had, regulated by the SFC, two exchanges receive their license to offer tokenization. Nearly a year and a half after the first exchange got their license, we have yet to see a tokenization offering what's going on, in other parts of the world that give you hope for tokenization.

Colin Butler: I think everybody is experiencing something similar to you in that it starts slowly and then it comes all at once. If you look back to 2015, you can see interviews where they would have a panel of insiders, and everybody would say tokenization is two to three years out. And here we are eight years later, and that promise has not been delivered upon in any way. So if you've been waiting for years, it's been a very painful period of years. A lot of people went back to 2018. There was a lot of promise, a lot of conversation around tokenization, and nothing happened. And I hear it all the time. They said, you know, Colin, we tried this as an industry in 2018, and it's not gonna happen. You could look at our general counsel. He said, I have two years of my life that I will never get back on this topic.

And he wrote amazing pieces on tokenization. So why do I think it's different now? I actually think it's happening now. I sit in a seat where I am in all the conversations globally. And when I say all the conversations, I'm thinking of the top 200 entities by AUM. So think BlackRock starting at 10 trillion and go down the list to number 200. Those are our conversations that we're having day in and day out. It is happening now as opposed to 2018 or anytime prior, because regulation is at a point where there is clarity on some use cases for tokenization. Once you get clarity on some use cases, it opens up a Pandora's box of efficiencies, increased revenue, and decreased costs. And if you think about the drivers of innovation, like why technological adoption, actually functions relative to prior use cases or solutions, it generally has to be an order of magnitude better or something that is completely novel. I can now do something for which there was no prior solution.

Walter Jennings: Okay, so Colin, we've got use cases today that, you feel are the closest candidates to live tokenization. What is unique about those cases and what can we learn from them?

Colin Butler: So let's take a discrete example. Let's look at Hamilton Lane. Hamilton Lane is a private equity manager that manages almost a trillion dollars in assets. Very few regular world people have even heard of Hamilton Lane, but they're twice as big as KKR, which is more of a brand name, with, I would say the general population. So the people at Hamilton Lane are some of the best money managers in the world. Their flagship equities fund has returned around 15% around, call it like mid double digits for years, if not decades. Your average person does not have access to this level of expertise in wealth management because prior to tokenization, you were required to be a qualified purchaser, i.e. 5 million net worth or more to participate in alternative investment vehicles like the Hamilton Lane Flagship e equity fund. Which by the way, announced that it had tokenized on Polygon about three weeks ago.

Walter Jennings: Congratulations on that.

Colin Butler: Congratulations to the world. I mean, this is to your average person, like me, I don't know your situation, but maybe we're in the same boat. So what this does is it shifts the mix from very wealthy individuals that are, call it pension funds, that have that qualified purchase or minimum to accredited investors. People that have $200,000 a year, actually, they make $200,000 US, every year, or they have a million dollar net worth, not including your primary home. That's the definition for accredited investor. It takes the minimum down to about $20,000 invested, which makes these types of products much more accessible for people. A broad subsection of the population, it took it basically from like a scenario where you have 1% of people globally that can access these vehicles for which are very high returns.

It helps, you know, the rich save for retirement. And now, let's call it, I mean, depending on where you are, but the middle class and certainly New York or Hong Kong would now have access these vehicles. So what we're talking about is the democratization of assets or the start thereof, and that's just the beginning and the end game is a situation where you can have somebody in India making $20,000 a year that wants to save for his retirement and the future of his family, but doesn't have access to things like Tesla stock in the US or various just basic investing and saving vehicles for which your average person in a lot of the rich world has access. That's where we wanna bring this in eventuality.

Walter Jennings: Now, Colin, for the $20,000 a year salary earner in India, let's talk about the on-ramp to be able to then participate into some of these assets and the ability to, you know, this week we've seen a number of the crypto friendly banks face challenges. So getting your dollars into and onto the chain and off of the chain have gotten a little bit harder. How are these developments going to impinge?

Colin Butler: So I don't think what's happening in the environment now is preventing future technology. And let me be more explicit about what I mean. The people developing these on-ramps have been doing this for months, if not years have been working towards this goal. And the challenges at Silver Gate or Silicon Valley Bank or Signature have not impeded that in any way because these processes are by the largest players in the world, the largest firms in the world, the people with the legacy payment rails and the legacy on and off ramps, and they are moving forward despite what's happening in the environment at any given time.

Walter Jennings: Yep. I can certainly see the institution increase their investments, but for the person who is trying to take advantage of the democratized access, it's a little bit challenging.

Colin Butler: It is a hundred percent challenging. First off, these technologies have not been released or announced to the public, so they're not ready yet. They're not there. Given my sea within Polygon, I would pause it to you, Walter, that you are gonna see a lot of movement as an individual in the next three to six months. And these things have been in the works for a very, very long time, but now is the time that they're coming to the mass market to ultimately allow that scenario where we can have your average person getting access to investment vehicles for which there was no prior access. And that comes through tokenization.

Walter Jennings: Fantastic, Colin, well, that's a great development and I'll look forward to coming back to you in three to six months to talk about some of these cases. Here in Asia, there had been a large focus on tokenization of physical assets, and here we're now talking about alternative investment into ETF or other funds. How about the physical assets, whether they're ships or buildings, or other tokenization use cases?

Colin Butler: It's very interesting. I hope I don't disappoint a lot of people by saying that there's a challenge in converting physical assets into either a digital twin or an on-chain identity in some form. If you think about my home in the New York City area, the registrar of my local municipality probably has the record of my home on that person's books. And it is a little bit more complicated to get that part of the process onto the blockchain than it would be for something like a stock or a bond or a fund.

Walter Jennings: Yeah, the land title office has a lot to answer for.

Colin Butler: Exactly before you and I can fractionalize and share our Netflix accounts, there's gonna be a lot of work that needs to be done. It's super cool. I mean, dreaming into the future, there's a myriad of use cases that are just super, super intriguing. What happens in the near term, I personally find intriguing, but that is the rewiring of the global financial infrastructure. There was a lot of creaky infrastructure built up over decades that everybody uses that is ripe for disruption by the blockchain. And as global head of institutional capital at Polygon, that is my day-to-day. Yes, there are really cool real world real estate use cases. There is like, you know, kind of memberships in wine clubs and art museums and art collections, amazing stuff. Like I'm super excited for it, but the challenges are physical in nature. So I don't know the timing of when we'll see ideas like that come to the real world. The timing of financial asset tokenization is right now.

Walter Jennings: Okay. And, we'll continue to see developments, we hope in the tokenization of real world assets. I do know here in Hong Kong we've studied green bonds and anything that can be measured can be sold. And the advantage that IoT bring to green development, green buildings that allow, the bond holders then to recognize their reward, through the on-chain display of the efficacy of their buildings.

Colin Butler: Yeah, it's a huge theme. The ESG theme is massive globally, I think it is finally starting to bear fruit after people having worked for years on this. What I think might be most intriguing is the idea that the markets for carbon trading, carbon credits are incredibly inefficient. It is hard for the producer. So think of the idea that say you own forested land and you are able to actually produce the carbon that would go into carbon credits. It's actually very challenging for you to benefit from that under any current economic scenario. So the people that are really producing the value are getting disintermediated by a lot of brokers and middlemen that take the vast majority of the value out of the chain. And with blockchain, there's a chance that you can take those players out and go direct and really accrue value to the people that are at the foundation of value creation.

Walter Jennings: So listen, Colin, after all the turbulence in the last 12 months, is there anything, that is a safe bet?

Colin Butler: Safety is really hard to come by, in the current world, it was a lot safer. Prior to Covid, it was a lot safer three months ago. It was a lot safer a week ago. But what I personally believe is safe is the secular adoption of blockchain technology. Think of the idea that the internet has taken decades to come to maturity. In 1998, my parents were worried that if they put their card online to buy on Amazon, that their identity was at stake. And now I think every probably five year old takes it as granted as that's unlikely, which of course it's not, right? There's nuances there. You have to be very careful on the internet. But the blockchain, in my view, will take a similar adoption timeline in that is a multi-decade secular trend that will be incredibly disruptive to many industries. It will ring out efficiencies in a variety of businesses. It will save a lot of costs, it'll generate a lot of revenue, and I think most important, it will provide new use cases for which there was no prior solution, but it's gonna take some time.

Walter Jennings: And Colin, how do you distinguish Polygon from other chain options out there? And what are the benefits to working on the polygon chain?

Colin Butler: You might have to get into specifics as to what you mean by other chain options, because it depends like the answer. Just like one of my early economics professors said, everything in economics, it depends as the answer. If you went to the layer one landscape, I would suggest to you that Polygon is focused on Ethereum because Ethereum has an order of magnitude higher security and higher decentralization than its next closest competitor. So we would really be focused on enabling cheaper costs and faster, faster transaction times for Ethereum. So, Polygon, just to really bring home that point is focused on bringing the world to Ethereum. How we do that comes in multiple solutions. One is proof of Stake. It's kind of our mainstay workhorse, the technology that we've had for a couple years that is very easy to use. It's very developer friendly, and it's very stable and very reliable. And personally, I think does a phenomenal job of getting a lot of these projects up and running with the security of Ethereum. What we have in the future, going on to mainnet on March 27th, which a lot of people are really, really excited about, in the global crypto ecosystem, is actually a product called ZKEVM. It stands for Zero-Knowledge Ethereum Virtual Machine. What that essentially does is a very, very high security, very high throughput solution to bring creators onto Ethereum.

Walter Jennings: Back in November 2021, I minted our first NFT, and we did that on Polygon because the gas fees were significantly below what Ethereum offered, and it was just a lot easier. And today, now with the introduction of your ZKEVM, it can now handle transactions up to 100 times more transactions per second than Ethereum. So you've really found a fast on-ramp off-ramp to the Ethereum chain.

Colin Butler: We, so we are Ethereum Maxis, I I have somebody that works for me. Again, I work in institutional capital. We work with some of the most conservative institutions in the world. He has a gigantic Ethereum tattoo on his forearm. So we are firm believers in Ethereum as the decentralized global settlement layer, for transactions. Where Polygon wants to play is as the execution layer. We provide cheap compute to subtle transactions that are submitted to Ethereum by zero-knowledge proofs, which essentially call it represents an unhackable bridge. So highly secure, inexpensive with high throughput. And all of those components are needed in order to really onboard the next billion users. Like they're critical, especially when it comes to finance. So I work in institutional capital. If you are going to be a major financial institution, sending billions, if not trillions of dollars across and settling on chain, you need something that is virtually infallible. And that's what we hope. We've developed over a billion dollars in spend. And quite frankly, zero knowledge has been decades in the works. Most people thought it wasn't even possible. And today we are telling people it is here now, it's been on Testnet for months, it goes on mainnet, March 27th, and it is a revolution in blockchain, blockchain technology. So we, we are very excited about it. I think the world should be excited about it.

Walter Jennings: It really is, a phenomenal development. And, yet on top of that 1 billion spent to date, you've also announced a 100 million grant aimed at incentivizing developers, to construct applications on the zero-knowledge platforms. What are some of the developments or that you are particularly keen to see or that are bubbling along in the background that excites you?

Colin Butler: So everybody within Polygon would have a personal take. Mine is actually infrastructure, and I think most people might say that is the most boring subject ever. It's not, NFTs, it's not, gaming, which I think would be amazing, once that use case is fully matured. But in the meantime, me having a multi-decade history on Wall Street, I think settlement and bringing the majority of financial payments, and financial assets over to blockchain, the form of tokenization, that to me is super exciting. ZK, zero knowledge will enable that to happen at a faster rate than I think at any time in history, because finally, the technology is there.

Walter Jennings: Now, along with financial institutions, we know that polygon has a number of partnerships with well-established Web2 companies. What is it about Polygon that attracts the Web2 crowd?

Colin Butler: You know, I have an official answer to that, and I have an answer that I will only give you Walter right now. Okay, the official answer, as I would view it, is a global premier institutional level of support for your organization. So if you are a Starbucks, you are everywhere in the world. You cannot afford the mistakes, you need massive amounts of support. And at the end of the day, when you partner with Polygon, everybody within the crypto ecosystem, like you could think of the idea that Polygon has the second largest community globally in all of blockchain only second to Ethereum. And to some degree, well, to a large degree, we also directly support the Ethereum community. So if you choose a partner within the blockchain, you have the attention of the entire crypto blockchain community captured right there.

The unofficial answer that I can only give you, is that we are laser-focused on communities. And so when we go to talk to Starbucks, we say, here are the benefits to your consumers and to your customers. We have people with decades of experience in the retail business, and we know exactly what Starbucks needs to see. When you abstract away all the crazy blockchain, cryptography, zero-knowledge technology. And so when we partner with somebody, they say, okay, these guys get us. They understand what we need and what we're trying to do. And it's not just about the technology, it's about people, and it's about communities. And communities are really what Polygon is here to serve.

Walter Jennings: Okay, Colin, look, you had spoken earlier that, you could talk all day about institutional defi or decentralized finance. We are seeing a few kind of errors at the edges between centralized finance and defi this week with banking collapses globally. How do you feel the adoption or the transition from Cefi to Defi is going, and how do we process these bumps in the road?

Colin Butler: I love it how you defined at the edges. I think anybody who, lived through 2008 and were kind of age where they were actively participating in the economy would recognize that this is a core challenge of, traditional finance. The challenges faced in 2008 to some degree have not gone away. I think as, a culture, as a society, governments did a great job of banding over some of the core issues, but as we saw in the past week, we are still vulnerable to your classic bank run. It's like a tale as old as time. We're still vulnerable to fraud, and still vulnerable to bank runs it, quite frankly, in the online era, like this was the smartphone bank run. It was literally like, you know, founders pulling money out on their smartphones. What Defi does is it allows for a level of transparency that enables your eye to understand our counterparty risk.

And I'll try to give a very concrete example, to what I'm saying. If you think in 2008, if everybody that banked with Merrill Lynch knew the risk that they had had on their books, would those people still have been clients of Merrill Lynch? And I don't wanna single anybody out, like these challenges are endemic in the financial system, but what I would suggest would be that institutional defi creates a level of transparency where you can very accurately judge the level of risk you're taking on. And it also ensures a mechanism by which you get repaid. You are not beholden to regulators to come in and save a bank and hope that they guarantee your deposits. You actually have access to those deposits by code when code is law. So that's, those are a couple of the areas for which I think Defi is, is intriguing.

And when, you know, when I say I could talk all day, like I'm kind of tempted to throw down the challenge and say, do you want me to try and talk for 12 hours about this? Can we run the podcast for the next 12 hours? Let's do a challenge, right? It's gonna be like the challenger around the world. I'll just be speaking for 12 hours, but quite frankly, nobody wants to hear me speak for 12 hours. So let me actually consolidate a thought that I have or an institutional defi. So what I think about in terms of the excitement around institutional defi, if I can consolidate, it would be the idea that in the future, people will have access to a dashboard, a consolidated point of contact where they can buy a money market fund, buy an alternative asset like Hamilton Lane, take a fractionalized share of my house on a Friday night if they wanted, and a menu of hundreds of other potential options all on chain, all in one place.

And then here's the key, they can borrow against those properties. So traditionally, if you had an alternative asset, you were locked up for six months, a year, five years. What Defi allows you to do is to borrow against that asset in real time. You know, if you're a pension fund, you see a near term opportunity for which you need capital or would like capital. You can borrow a short term against your long term Hamilton Lane asset and make additional percentage returns on the money that you have invested. And then you also have 24 7 liquidity in this whole universe that I think is being created right now. That's the future picture.

Walter Jennings: Right. And Colin, would that ever bubble down to your level where suddenly you have 24/7 access to borrow against your house, to use that for other investments?

Colin Butler: There's a million ways you could go with this. And I think that there's a lot of really, really interesting future scenarios, and I think that's one of them. I think that's a great idea.

Walter Jennings: Everything you are doing is aimed at, making Ethereum even better, faster, uh, or more adaptable. Will there ever be a time where polygons, working on alternative chains?

Colin Butler: Currently, they're not on the roadmap. There could be a time the technology would allow for that. But while Ethereum has the, by far highest security in decentralization, we're gonna focus on Ethereum, given that context, because we think those two things are very, very, very important. Those ideas are really the reasons why a lot of people are in this business to begin with.

Walter Jennings: Now, in order to transact on Polygon, I need access to matic. And I understand there's some 4 billion matic coins out there. How much volatility have you seen in your own house coin at Polygon?

Colin Butler: A couple answers to that. So one, I think there's, north of, call it 8 billion Matic tokens in circulation. We tend to think more in terms of the, kind of, the polygon as a whole, uh, really a foundation that is an infrastructure provider, really a technology infrastructure provider. So we tend not to discuss as much, uh, topics of, of circulation. Um, but my, I guess my, my macro view on that would be whatever we do has the intention of creating a blockchain that will withstand 30 or a hundred years, ideally, like an indefinite period of time where this becomes a public good available to people in perpetuity.

Walter Jennings: Well, that's a great way of taking a long-term view on this Colin, and putting your daily tasks into a longer term perspective. And, I do hope Polygon is here for thirty to a hundred years from now.

Colin Butler: Thank you. I hope so, as well.

Walter Jennings: Now, Colin, we have a section we call News in the Finoverse, an opportunity to share any updates. Now, we mentioned the Zero knowledge advancements, but are there other updates from Polygon that you'd care to share?

Colin Butler: I would love to share, Walter, unfortunately, many of them are under NDA. The preview that I can give everybody on this podcast is that you will see in the next three months a series of news announcements from the traditional finance sector that are bigger than anything that we've announced to date. My view, everybody has come, the biggest players are all gonna participate in this arena, and you are going to see announcement after announcement after announcement that these people are entering the blockchain space. I, for me, it's in my career personally. This is a career high. It is super, super exciting. You're not gonna see it a year from now. You are gonna see it within weeks and short.

Walter Jennings: Months. Fantastic. Colin, well, we'll look forward to you, telling us, hey, that's one of the flags I told you to look out for as we go along on this journey, along with these upcoming announcements. Um, is there anything, exciting or interesting that has your attention now in the defi world, or in Polygon? Any developments that particularly enthused you?

Colin Butler: Yeah, for me, it's this ecosystem just being built out. That idea that you could have a one-stop shop where you have 24/7 liquidity and you can borrow against even your illiquid holdings in Defi, like that concept is just fascinating to me. And you partner all that with the democratization of assets. You make all these things available to people across the globe to people without access to bank accounts, without access to the American style or Hong Kong style saving vehicles. I think that is super cool because I think that there's a lot of people that are shut off from the current system, generally oftentimes by force, whether it be at an individual level or at a government level. And those people are people that we can now bring in as participants in the economy, and it creates freedom. And, you know, in America, we are big on freedom. We're freedom maxes for, whatever that means. This to us, enables that level of freedom for a lot of people. And so that is quite frankly what kind of motivates a lot of what I do and was super exciting to me.

Walter Jennings: No, look in the democratization of financial services is a primary motivator for us at Finoverse. And here in Hong Kong, we certainly do have a well-banked city, but, coming from Asia, there are hundreds of millions of people without identification or access to financial services. So, this will make massive changes in the lives of millions of people.

Colin Butler: Hundred per cent

Walter Jennings: Now, Colin, to power your journey in the Finoverse, we have a segment called Tracks in the Finoverse where we ask people to share with us the music that drives them along on their trip in whatever they're doing in the Finoverse. So, Colin, what song would power your journey?

Colin Butler: I have a really weird one for you, and I don't know if it's gonna resonate. We'll see if it hits. The song is actually Immigrant song by Led Zeppelin. If you look at the words, in the track, it is actually all about the Vikings. And so what that embodies for me is that sense of adventure, that kind of indomitable spirit that you actually need. If you were gonna be deeply in crypto, wow, like your day swings like crazy. You have to be a warrior, to go against what your parents think, what your family thinks, what your culture might think, what your regulators might think. In order to bring the next wave of technological innovation to the world. You have to be a Vik. So that's the one that I'm gonna throw out to you. It will resonate with some people. It might know with some, but, that's the thought that I had when you first posed the question.

Walter Jennings: Very, very good song. And it's a great story to share, because you do that energy and power to get through each day, don't you?

Colin Butler: You absolutely do.

Walter Jennings: Well, Colin, it's been a real pleasure speaking with you here on Waves in the Finoverse, and thank you for the podcast interview. We'll check back with you in a few weeks or months to ensure that you're keeping to your word with all of those announcements. And we look forward to hearing more from yourself and from Polygon in the near term.

Colin Butler: Well see. Now I really need to deliver, so the bar is very high, but Walter, it's been a pleasure. Thank you so much for having me on the show. I look forward to speaking with you soon.

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