Backed: Pioneering the Future of Asset Tokenization

Revolutionizing Tokenization of Real-World Assets

Welcome to our engaging interview series, "Behind the Startup." In today's edition, we have the privilege of diving into the fascinating story of Backed, a groundbreaking company at the forefront of bringing off-chain assets onto crypto rails. Join me as we explore the journey of Adam Levi, one of the co-founders of Backed, and unravel the remarkable tale behind their innovative approach to tokenization.

Ishan Pandey: Hi Adam, welcome to our series “Behind the Startup.” Please tell us about yourself and the story behind Backed?

Adam Levi: Hi Ishan, thanks for talking to me today. As a quick intro to me, I have a PhD in Physics and I’ve been interested in blockchain tech for a long time. For Backed, Yehonatan, Roberto, and I - the three co-founders, had worked together previously in the crypto space. We had an exceptional experience working with each other and felt like we could build great things together.

We explored various directions, from liquidity pools for instant L1/L2 transfers to crypto offering infrastructure for traditional banks. We eventually landed on tokenization of real-world assets.  Our main observation was the success of stablecoins and understood that they were just the first assets in this category.

In early 2021 we started legal research to see if there was a suitable jurisdiction for our idea to be implemented. We researched the United Kingdom, Germany, Singapore, Malta and others, but settled on Switzerland when we discovered the Swiss DLT Act. Next we ran a feasibility study and created a demo which enabled us to raise a seed round led by Gnosis and Semantic Ventures.

From here we started building the team, first to develop the software and legal framework, then compliance, business development, product and marketing. We built our issuance and redemption platform, and had our EU Prospectus filed and approved. Then, in early Q1 this year, we released our first tokenized product on Ethereum, bCSPX, which is an S&P 500 tracker. Since then we’ve released six additional stock and fixed-income tokens with many more in the pipeline, and now support native token issuance on seven blockchains including Gnosis and Polygon - and our tokens are used by DeFi projects including Ribbon Finance and Angle.

Ishan Pandey: Please tell us a little bit about Backed and the Swiss DLT Act-compliant ERC-20 tokens that are pegged to the value of tangible assets in the real world.

Adam Levi: Backed is on a mission to bring off-chain assets onto crypto rails. We issue ERC-20 tokens that track the value of stocks like COIN or bond ETFs. The tokens are freely transferable across wallets, fully collateralized by the underlying assets, and issued in compliance with Swiss regulation. We chose Switzerland and decided to headquarter the company there because it is at the forefront of blockchain technology regulation.

The DLT act underpins the legitimacy of our operations by allowing us to create tokens that are backed by and track the price of real-world assets in a regulatory jurisdiction that recognises permissionless transfers and settlements on the blockchain as transfers of ownership. We feel that choosing such a robust legal framework inspires trust in our product - we could have set up a similar business in a different jurisdiction with less strict regulations - but that could come at a cost.

As part of the bigger picture, moving on-chain is the natural evolution of equity markets - as blockchain technology is much more efficient for these sorts of transactions. It could take days for a security transaction to settle - but with blockchain, it can be minutes or even seconds. Equally, it means crypto-native companies don’t need to turn their assets into fiat, or “off-ramp”, if they want to diversify their treasuries or balance sheets.

Ishan Pandey: Please explain the basic structure of an ERC-20 token and elaborate on its key components? What are the advantages of using ERC-20 tokens over traditional cryptocurrencies or other token standards?

Adam Levi: ERC-20 is the standard for fungible tokens on Ethereum and all Ethereum Virtual Network blockchains. Using ERC-20 tokens means that our tokens are automatically interoperable with other protocols, products and services also on the network. ERC-20s can be used to represent virtually anything - in our case, they represent ownership of a structured product which in turn is fully collateralized by the underlying assets whose price it tracks. So to use one of our products as an example, a bIB01 token will always be equal to another bIB01 token.

Ishan Pandey: Please elaborate on some common standards or protocols used to achieve cross-platform composability. What role do bridges or interoperability protocols play in enabling cross-platform composability?

Adam Levi: It made sense to have Ethereum as our first chain, as it is the most widely used. The tokens can also be bridged to other chains such as Polygon and Gnosis, as they themselves are compatible with the Ethereum Virtual Machine, however, we also issue on these chains natively.

We chose to use permissionless, fungible tokens (ERC-20) as we believe in free transferability and interoperability. There are many other token standards in our space - ERC-1440 and ERC-3643 are popular. ERC-1440 is non-fungible and permissioned, while ERC-3643 is fungible and permissioned. These have their pros and cons, but we chose ERC-20 as we want our tokens to be the building blocks for crypto and decentralized finance (DeFi).

Ishan Pandey: What are the potential regulatory considerations for projects working with collateralized ERC-20 tokens?

Adam Levi: On our side, we must perform many regulatory requirements to offer our products. We need to do know-your-customer checks (KYC), know-your-transaction checks (KYT), and anti-money laundering (AML) compliance, and as a Swiss company we are, of course, audited.

We can only directly sell our tokens to qualified investors and licensed broker dealers, and we have a prospectus approved in Liechtenstein.

Ishan Pandey: Can you explain the process of tokenizing an asset and creating an ERC-20 token backed by that asset? How is the value of a collateralized ERC-20 token determined and maintained?

Adam Levi: Let’s take our flagship product bIB01 as an example. The process engages with many areas of traditional finance - which is the tricky part. We work with brokers and custodians to acquire and hold the underlying asset - iShares IB01 - which is an accumulating ETF that tracks the investment results of USD denominated government bonds. We then create a type of structured product called a tracker certificate, which as the name suggests, tracks the price of that underlying asset. Then, we create the ERC-20 token - bIB01 - which is an ownership unit of the structured product.

The value is maintained because Backed issue and redeem tokens at net asset value, or NAV, plus a small fee. The mechanism of putting the off-chain price on-chain for use in the ecosystem is through using oracles. Oracles take off-chain data and put it on-chain, and decentralized oracles are networks of node operators that are rewarded for giving accurate information about something - it could be the weather, or traffic data - but in our case, it is the price of the underlying asset. We built our own oracle, plus Chainlink provides a decentralized oracle for this specific product, and they will eventually provide oracles for all of our products. This is how the value is determined and maintained every day.

Ishan Pandey: With respect to collateralized ERC-20 tokens designed with a bankruptcy remote structure, what factors should be considered when selecting the underlying asset for collateralization?

Adam Levi: First I should explain how the underlying asset for our tokenized real-world assets are bankruptcy remote. Assets such as stocks or ETFs are not like cash deposits, which are effectively loans to the bank. Instead, they are book-entry securities, which are not part of the bank's balance sheet, meaning they are not part of the liquidation process of the bank in case of insolvency.

So as well as the security around the custodian itself, we have a tri-party agreement between the custodian, ourselves, and the security agent. This agreement grants the security agent the power to take control and facilitate redemptions if Backed were to face a situation of default or bankruptcy - giving token holders a claim on the value of collateral assigned to each product.

In terms of selecting the asset and deciding on new tokens to issue, we analyze the market and look for demand. Additionally, one of our customers may want a specific asset to be tokenized for their use on-chain, and we can provide this for them.

Ishan Pandey: How does the Swiss DLT Act address data protection and privacy concerns related to DLT and blockchain technologies?

Adam Levi: The Swiss DLT Act does not address privacy. It actually addresses the topic of registry of ownership. There are s everal ways to establish ownership over assets. It could be a government database such as land or car ownership), paper certificates for shares, or a bank entry note for shares in bank custody or deposits in a bank account to name a few.

The Swiss DLT act basically adds a distributed ledger as an additional method of defining the ownership over an asset. Once such a relationship is set, then the change of control over the distributed ledger entry (a token, for example), would be the actual change of ownership of the associated asset.

The beauty of this act is that it defines the use of blockchain as a technical manner of ownership registration, and leaves all other regulatory aspects unchanged, so it provides continuity in regulation. As far as privacy is concerned, Switzerland is introducing a new privacy bill that would be very similar to the EU’s GDPR.

Ishan Pandey: Lastly, we would like to know a little bit about the future development plans of Backed and what does the roadmap ahead look like for the community?

Adam Levi: We’ve seen a lot of market interest, hype and support for our project which we are incredibly grateful for, but we don’t really consider ourselves to have a community as such because we don’t have a native token and are not a retail-focused business.

In terms of our roadmap for future development, we’ve put in place the foundations for growth - foundations such as a regulatory framework, hiring a highly skilled team to build our platform and release our first products and go-to-market. The next steps are to build upon those foundations by natively issuing more tokens on more chains, and expanding our range of products and their use cases. We’re really proud of what we have done so far, and excited for what’s to come!

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