Tokenised Wine: Modernising an Ancient Market

Good, Ian, great to see you. Thanks for having me.

So, a good place to start is a quick bit of my own background. I spent over a decade in the traditional wine investment market, split between the UK and Singapore. So I've dealt firsthand with the alternative asset sector, what works, what doesn't, what the demand is from the customer side. And everything I've built in the last four years is really born out of personal frustrations, and out of understanding where the biggest opportunities are. For me, the bigger the inefficiency, the bigger the potential opportunity.

So, start thinking about how you'd invest in something like fine wine today. Firstly, there are pretty high minimum investment levels. There may be products that let you do it from five, ten thousand pounds, but realistically, if you want sufficiently diversified exposure, if you want access to the best stuff, then you need to be investing 50 to 100k, which already eliminates the vast majority of the population. You're looking at pretty archaic investment structures: no formal institutional-grade compliance or regulation. We're talking: buy a collection of fine wine, physical cases, store it professionally, have a go at trading it if you can, and then sell the physical cases. So it's great fun, and the high-level performance figures of the asset class can be quite good, but beneath the high-level figures there's so much friction, super-high cost, really difficult to manage. You're reliant on so many third parties that what you end up with is a fun investment, but quite often most of the net gains are eroded by the illiquidity and the cost of management.

So we developed a new token type, which is an extension of the standard NFT that embeds a legal contract. That legal contract is a little bit like a perpetual call option. So, as the owner of the NFT, it doesn't mean I own a case of physical wine, but I do have the sole right to redeem one for the other. The physical wine can stay with a custodian in a warehouse, and I can own the digital asset. And once you've got the NFT, we've seen firsthand what NFTs are capable of in terms of exchange and tradeability: super-low friction, low cost, all around the world, immediately. To be able to exchange ownership of a case of wine around the world immediately, with no third parties, to be able to do that digitally is game-changing. Now, really important to highlight at this point: we're not selling or trading individual cases of wine, or even the rights to individual cases of wine. That doesn't really solve a problem, because selling wine is hard, and then trying to convince someone to buy an NFT representing that case of wine is not going to happen.

So the big question for us was, obviously, one of Larry Fink's comments is that all assets can be tokenised. And of course all assets can be tokenised, but does that mean they should? How are they being tokenised? The big question to us was: how do we actually solve problems once you've got that digital asset? And you've mentioned the ETF style, also an important disclosure: the products we issue are not regulated or structured as ETFs, but they're heavily influenced by their design. So if we want to improve accessibility, scalability and liquidity towards wine as an asset class, instead of as an individual physical case, then learn from what ETFs did for equities 30 years ago. You don't need to reinvent the wheel. So off the back of that, we launched the world's first wine-index-tracking token, an ERC-20 token, but backed by digital reserves. Each one is backed by a physical case, and it gives exposure to the benchmark index of fine wine. So for the first time ever, someone can invest 100 quid and get exposure to wine for a fraction of the price, with much better transparency, regulatory consent, and improved liquidity. So it's taking everything that's inefficient, physical assets, step one, make them legally digital; step two, put them into the same sort of structures that have been used before, but in an on-chain environment. Our products exist solely on-chain.

So this is actually really hard to describe without being able to show you.

That's not enough time. What I wouldn't be able to describe is just how inefficient the current solutions are. If I told you that trying to sell one case of wine to another person, or between entities, say one product and another product, for, maybe, a 500-pound case of wine, involved four different people, four different processes or systems that were not interoperable, two or three different emails, two or three days, that's bang on the money. We're talking a couple of different really old, outdated Excel models getting plugged into it. So you need to be able to get completely away from the reliance on all of those third parties, the storage facilities, the auditors, the shippers, the inventory-management companies. All of that is so, so behind, but we can't reinvent all of it. That has to continue in its current existence, and we have to find a way to work around it. And the solution is: all of that remains untouched. As soon as we've got the digital representation, we're off to the races. They don't even know that the physical case of wine they've got in custody, actually, the person who can have it physically redeemed may have changed 10 times over in 10 minutes. So it's really just fully committing to the thesis that all assets are moving on-chain. I've got absolutely no doubt that this is the plumbing for the next 30, 50 years of the financial markets.

Yeah, painfully so. One of the biggest pain points of investing in these assets traditionally is the illiquidity. So, Ian, say you've invested 100 grand in wine and you want to get 10 grand of cash out, you've got to sell maybe 10 unique wines, which have to be sold to 10 unique buyers. That's quite a hard process, finding 10 buyers for those particular cases. That's going to take a couple of months, maybe, to settle, and you'll probably take a bit of a haircut on price for the complexity and the fees in the middle. But once it's all in this on-chain ecosystem, you don't need to resell cases of wine. You just need to resell exposure. It's 10 grand of exposure to a whole market, and it happens at a smart-contract level, so it's immediate. There are no invoices, no receipts, no payments in the middle. There's no friction on settlement. So it massively advances how these alternatives can be traded, and it makes it, really for the first time, that they belong in mature, sophisticated portfolios, not just ultra-high-net-worths or family offices, but institutional investors, who can then pass on exposure to, ultimately, retail. For the avoidance of doubt, we're not targeting retail directly, that's a huge thing. But this does create the institutional settlement and plumbing for larger companies to do it for their customers.

So there's the last-few-years story, and then there's the long-term story.

The long-term story is good. It has to be a long-term asset. If you look over the last 20, 25 years, as long as you're holding for four, five, six-plus years, you should be pretty safe with six to eight, maybe 10% per annum average annualised. It's still cyclical, there are still down markets. And, as you touched on, super-low correlation, low volatility as well. Now, that low volatility is also partly a result of the lack of liquidity and perfect data availability, but still, the price is pretty steady. In recent years, not so pretty. Since, I want to say towards the end of 2021, we had three or four years of month-on-month negative prices. If you invested at the peak of the market, around 2022, and held until now, not great. But what that doesn't tell you is that the preceding three or four years were actually 12 to 15% per annum. So, as I say, if in doubt, zoom out. That does mean the market today is at a pretty good price point. I've been out of the game of having to analyse and make recommendations on the wine investment market since moving into fintech, but if I were in that game, I'd be pretty confident that now is a good time to be allocating. Never call the bottom of the market, of course, but it's starting to look a little bit better. But this is only about diversification. Something like wine, or art, watches, whisky, cars, Hermès handbags, they're only ever going to be five, 10, maybe 20% absolute max of your broader portfolio strategy, if you're really into these assets. So it's not just about the performance, it's also: what does it bring? What's the defensibility?

No, no, psychology is, I mean, we're so predictable. When markets are up, everyone's absolutely piling in, because "this can only ever go on." And, frustratingly, when it's down, despite the advice to buy when there's blood on the streets, there are few people who've got the balls to do it. For most people, the last four years have been bad, so we're getting out now. But you have to follow the advice and try to be a little bit more counter-cyclical.

So, at this point I'll explain a little bit more about the business model.

What we've done to date is launch our full proof of concept, and we're now at the point where we start doing this for other people. Over the last four years, a huge amount of R&D, a lot of stealth, 18 months getting our regulatory solution, which is in Jersey, under the Jersey Financial Services Commission. We got pretty pally with the regulators in Singapore and Dubai, and the UK as well. And, having launched this product, which is called SAVW, and which, as you say, tracks the Liv-ex 1000, the benchmark index for fine wine. It's a third-party index that's been around for 20 years, broadly speaking, the top 1,000 investment-grade wines in the world. Unlike the S&P or NASDAQ, where there are hard and fast rules about what goes in, this is a bit more about balancing brand, availability, pricing, secondary market and a number of other metrics. So it's as close as you can get to investing in the market for fine wine. We launched this product in Q4 last year, and got our first half a million in sales to 10 customers from our private networks. We had to do a private launch initially, to give the JFSC confidence that what we'd designed, because this was the first product of its kind to be released, worked, and was technically sound and safe.

So it's not an issue in terms of the life of the wine, its drinking window, the age after which a wine declines. That's not a problem, because the index we track is of young vintages. It's typically wines that are first released, and then for 10 years after release; then they exit the index and the new vintage comes in. Most fine wines you don't tend to approach within the first 10 years anyway, there are plenty of exceptions, but what we're exposed to are generally considered young, so we're two, three decades before there's really any risk of them coming out of their drinking window and declining in quality. The more salient point is that initial production levels are low. Production is limited by geography, the size of a vineyard is only the size of a vineyard; you can't produce infinitely more grapes from the same plot of land. But it's also capped by law: for each wine region there's local legislation. In Bordeaux it's the AOC, which says, however good your harvest is this year, you can only release X number of bottles per brand, and that's to ensure quality and protect prices. So supply is absolutely capped, and can only decrease as time goes on for a particular vintage. So that's more of a cap on the market size. And, to be honest, that's what's hindered wine investment companies before: you get to this point, after insane growth, onboarding customers and AUM, and you reach a certain point, whether it's 250 million or 500 million, where there's actually no more wine that qualifies, so you can't keep going.

Because, very frankly, it's not in the interest of wine producers, distributors and suppliers, nor consumers, to just keep selling more wine to a single fund that's going to lock it up for 10 years. They want to see it being sold, drunk, traded and talked about, being on social media. So it comes to a point where they say, "well, that's kind of enough for you." That's at least without continually growing your headcount, which is what we want to get away from. So, realistically, to answer your question, something like SAVW, tracking the whole wine market, probably does have a ceiling, whether that's 500 million or a billion, uncertain, but the whole idea is then to replicate that structure across, potentially, sub-indices within the wine market, Bordeaux, Burgundy, Tuscany, for example, or just different managers. You know, why not have a BlackRock-managed or Fidelity-managed wine portfolio? And, sadly, I don't think they'll do that, but obviously that's the natural progression. Some of the conversations we've had over the last six months, and, sorry, I know I'm pulling us back away from wine, which I know you're

Okay, we'll go to the next question, in case it fits in.

Yeah, so, obviously, we're not talking mainstream markets, we're talking alternatives.

Physical alternatives, yeah. Generally, the assets that will come on-chain properly, elegantly, first will be where the most inefficiency currently exists and the least complexity exists. It may seem those slightly contradict each other. Property, real estate, huge opportunity, everyone recognises that. But buying and selling property, real estate, land, commercial buildings, it's an insanely complex process. Tokenising rights to land is super-difficult. To date, I think Dubai has still really got the only true case of tokenised property or tokenised real estate, and that was massively successful, but really complex. So it will take a long time, but the curve will be aggressive once it's figured out at scale. Why I think things like wine and art work is because the processes and systems around them are super-inefficient and outdated, because there hasn't really been much pressure to improve them; it worked fine for the people who wanted it. But they're not that complex. It isn't that difficult to change ownership from one thing to another; storage is pretty straightforward. It doesn't mean we need to figure out multiple third parties and get their buy-in, you can just have this digital layer sitting on top of it, slightly without their knowledge and cooperation. So, aside from the obvious ones we've spoken about to no end, some of the interesting conversations we've had over the last six months, yeah, can I just pause? So, content

So, for the listeners, GFIN is the Global

Catchy. So this is like the governing body for the world's largest financial regulators. This was at their AGM, where they all come to talk about the latest trends, what's working, what's not. Obviously AI was huge, tokenisation was quite big, and many other things. I was probably three-quarters of the way through this two-day conference, and there was a lot of quite, I don't want to say dry, that's not fair, because it's super, super important

I had to get the room up from their laptops. So "tokenising the horse sperm" was an obvious way to do it. And that comes from a true case study. Towards the end of last year, I was in the Middle East speaking to a sovereign wealth fund, initially about what Savea is currently doing, in the context of raising funds. From their side, they were really interested in the solution, really interested in tokenisation of real-world assets, but: "if the only product you've got to market at the moment is tokenised wine, we obviously can't do that, that's not going to work. But once you're doing other stuff, then it's potentially something we can carry on talking about." And I mentioned art, as I did to you, I mentioned that exact conversation, and they said, "well, brilliant, as soon as that's progressing, we're in. And, by the way, think about, we have interest in", so, what I can say, "we have significant interest in horse racing and bloodstock. Can you tokenise that?" So the tokenisation of horse sperm is a sort of ongoing conversation. But also, I've spoken to oil and gas rights companies in Texas; I've spoken to macadamia nut farmers in Zambia about financing macadamia nuts through tokenisation structures. In fact, my next call today is with a super-talented British karting racer, with F1 aspirations. They've already got an investment structure, sort of bridging investment and sponsorship, and the conversation is to explore: is this something that can be tokenised, or, more pertinently, is this something that should be tokenised? That's the big question. So everyone's looking at this as an opportunity to solve one or more problems of access, scale, secondary market, and it's just going to be a huge amount of testing what works best, and what should just be left as is.

2022. So the last couple of days, my LinkedIn has been filled with people congratulating me on my work anniversary, so I'm guessing that's four years ago.

Easier now, for many reasons, but also more difficult, for many others. Four years ago, tokenisation wasn't really the terminology, certainly not "tokenised assets" anyway; that vernacular is only two, maybe three years old. We were just talking about digitising an asset. And as recently as, okay, almost bang on a year ago, I was at a House of Lords roundtable talking about whether blockchain is the solution for public-services infrastructure. A year ago, remember. And the first question from the audience was, "what's the difference between blockchain and Bitcoin?" And the second follow-up was, "isn't Bitcoin just for laundering money?" And I'm like, right, we can't have a meaningful conversation if we're having to go back to basics about what's blockchain, what's Bitcoin, what's a crypto asset, what's a digital asset, and then the whole money-laundering conversation, no. I was back at the House of Lords this Monday, and I'm not just name-dropping, it just happens that I was back there earlier this week, and there was absolutely none of that. Every single person in the room, a room of 80, 100 people, everyone knows this is the direction we're going. It's just: is it this version or that version, and what's the best way to get to each of those end states? So that is so much easier. We've been on a panel together before, we speak a lot, and the whole explaining process is becoming much easier, because instead of educating, you just talk about user experience.

Yeah, I mean, that's the thing. That's why Apple succeeded where BlackBerry didn't; where Spotify succeeded where Napster, maybe that's slightly more complicated, didn't. It's just user experience. I don't really want to know how it works, I don't want to know how clever or cool the underlying technology is. Does it make my life better? And is it any effort to switch over? No? Cool, I'm switched, I'm on. So that's significantly easier. What's harder, and this is what we bought into, and it's harder for a good reason, we took a stance from day one that we were going to be not just pro-regulation, not just seek a jurisdiction to get regulation, but find somewhere where we could really input, and have it shaped around our product and design. Because we were probably one in a thousand in 2022 saying, "come on, let's get regulation going." Everyone else was saying, "no, no, let's move fast and break things." And we all saw what came out of that. Not saying that's bad, it's just part of the cycle. But now that more people realise progressive regulation is needed, obviously you're held to a higher standard. So it does mean you can't play around quite as much, because you've got responsibilities, you've got a lot of people and a lot of processes reliant on you. It's harder in the sense that you're playing in the big boys' playground now. The moment that Larry Fink and Jamie Dimon and everyone switched, well, Jamie Dimon hasn't really switched, but he's at least conceded the import and demand

But the moment Fink in particular switched from saying "Bitcoin's a con" to saying "tokenisation is the future and blockchain is the infrastructure we're all going to be based on," then you switched from being the peripheral fintech rebels to actually leading, you become quite serious and mainstream quite quickly. So that's hard enough, but it's a good thing.

Yeah.

Yeah, six thousand years, since the first evidence of wine being treated as a tradeable commodity. So you're absolutely right. It's not the old versus the new; it's just an evolution. It's the same conversations that would have been happening in the '90s: "what is the internet? It's good for this, it's bad for that." And, actually, it turns out it's going to be significant for completely different reasons than we first thought. It doesn't have to completely change the underlying, it's just wrapped in something new.

So, I suppose I've slightly given away that we're working on our first partnership at the moment, because

No, I don't think I did. It depends when the podcast is going out. We'll find out soon enough, hopefully. But that's significant for us, because it marks the turning point. Once that's live, then we can be quick and nimble to replicate it with existing asset owners, and, my god, there's a lot of them. There's potentially two, three trillion dollars' worth of assets that fit directly within our ecosystem, out there, stored, value locked away, inaccessible until it's sold. We can plug in infrastructure that means they don't even have to physically move, no one needs to do anything, and it brings the value into this completely new ecosystem. So the value that can be unlocked really quickly is super-exciting. Aside from that, I suppose the biggest challenge, but also exciting thing, is fundraising. We're about to launch our seed round. But any founder, or anyone with experience in the space, knows you're pretty much always fundraising.