A “crypto year” is frequently likened to seven normal years due to its rapid pace of innovation. However, when it comes to embracing novelty, institutions do not proceed at this fast pace. They experiment and develop cautiously, and these initiatives are now thriving, much like blooming spring flowers and cherry blossoms.
The recent major news is that BlackRock, the largest asset manager globally, is among the progressive businesses launching a blockchain-based tokenized fund backed by U.S. Treasuries (BUIDL) on a public blockchain. Large firms such as Franklin Templeton, Hamilton Lane, and Wisdom Tree have tokenized ’40 Act funds. Moreover, KKR, Apollo, and Hamilton Lane have tokenized private equity funds. JP Morgan has demonstrated tokenization of the repo market and real cost savings. Societe Generale, HSBC, and the European Bank have issued tokenized bonds, to name but a few instances.
Annelise Osborne, a speaker at Consensus 2024, is the author of “From Hoodies to Suits: Innovating Digital Assets for Traditional Finance,” which will be released in June and is available for purchase.
Various proof of concepts are being performed, such as Citi, WisdomTree, and Wellington’s partnership in the private market space. With Project Guardian, numerous banks and counterparties are collaborating to transform wealth management. Numerous institutions, including the DTCC, SWIFT, BlackRock, Barclays, JP Morgan, Barclays, Citi, and Vanguard, have conducted experiments in settlement and clearing. Of course, this is just a fraction of the broader picture.
The application of blockchain technology and digital assets has brought and continues to bring advancements to capital market efficiency. It’s far from being a fleeting craze.
Let’s explore two primary scenarios: 1. digital money or stablecoin and 2. the tokenization of traditional investment avenues, which are frequently referred to as “real world assets” (RWA).
Stablecoins are a type of cryptocurrency built to maintain a “stable” value, which is typically supported by a currency or a compilation of steady assets. The capital markets’ primary support stems from money, and a stablecoin is a digital imitation of money. Stablecoins, just like all other cryptocurrencies, immediately transfer ownership as opposed to a delayed settlement or a float. They’re also programmable. The stablecoin market cap amounts to a significant $157 billion.
The dependence on physical cash or fiat currency has drastically dropped due to the preference for credit cards, debit cards, and the shift towards mobile wallets. For point of sale transactions in the retail sector in 2023, cash payments in the U.S. represent a meagre 12% of all transactions. Most transactions, like bank transfers, salary payments, and bills, involve a series of number transactions between banks and accounts rather than a convoy of $100 bills or bars of gold. How much physical cash do you keep on hand?
More crucially, financial markets are global. Stablecoins facilitate 24/7/365 market hours. The institutional interest in stablecoins is underscored by settlement, treasury management, and cross border payments.
The Federal Reserve is introducing an instant payment service, dubbed FedNow, that’s available to banks. This highlights the recognized issue around the delay or ‘float’ period involved in money transfers. The introduction of this service has been met with varied responses; notably, it doesn’t offer the same flexible options as programmable money like stablecoin. Both the Fed and the Treasury Secretary are investigating the potential use of Central Bank Digital Currency (CBDC), essentially a digital form of assets.
JP Morgan uses its own internal stablecoin, labeled JPM Coin. This is supported by depository receipts and can be utilized within the bank for payment transfers and settlement. The transaction volume for JPM Coin has reached $1 billion per day and has reported potential savings of $20 million in 2023 in repo transactions.
Societe Generale has recently unveiled a Euro-denominated stablecoin named SG-FORGE. This stablecoin operates on a public blockchain and is accessible on the BitStamp exchange.
Just last year, PayPal introduced its own stablecoin (PUSD) to its customer base of 435 million. This allows users to exchange the stablecoin for bitcoin and use it to make retail purchases. It’s expected that PayPal will soon permit cross-border payments with this stablecoin as well.
Figure Technologies plans to launch an interest-bearing stablecoin, priced at $0.01 per token. For this stablecoin, KYC/AML whitelists and SEC approvals are required. It seems to follow a pattern similar to the Arca U.S. Treasury Fund which issued ArCoin, a low-volatility token backed by U.S. Treasuries.
Notably, a bill proposing regulations for stablecoins has been introduced by U.S. legislators. The bill demands a 1-1 financial backing for stablecoins and calls for a ban on algorithmic stablecoins. We are monitoring the progression of this legislation.
Investors are becoming more attentive as the world’s largest asset manager undertakes tokenization of their first fund. Tokenization involves issuing a digital equivalent for any asset or instrument. Institutions are now bringing to life what the digital asset sector has been promoting since 2018.
Presently, significant strides are being made in tokenizing ’40 Act funds, with the focus on increasing efficiency. Tokenized U.S. Treasury funds have already exceeded $1 billion. Franklin Templeton confirmed that their ’40 Act Fund has noted operational benefits from the use of a blockchain-based system, such as enhanced security, faster transaction processing, and cost reduction, all of which are advantageous for Fund shareholders.
Tokenized bonds are becoming increasingly common outside of the US, largely due to regulatory uncertainty. HSBC has tokenized a government bond worth HK$600 Billion, which was issued in four different currencies. This digital bond has reduced the settlement period from five days to just one. Moreover, the legitimacy of tokenized bonds has been boosted by ratings from the reputable Moody’s.
The U.S. has also witnessed the emergence of tokenized mortgages. Figure Technologies stands as one of the leading firms in this arena, by tokenizing not just mortgages, but also Home Equity Lines of Credit (HELOCs), and carrying out rated tokenized securitization. Moreover, they have introduced their DART system, as a competitor to the monopoly of MERS, in the US mortgage market valued at $19.3 trillion.
Big-name investment banks, like Citi and Goldman, are now offering tokenization services to their clients. However, this is just the beginning.
Institutions are putting effort into creating and delivering digital asset tokenized products. Given the significant advantages presented by blockchain technology, it’s impossible for capital markets and institutions to ignore it. Even though adopting change and updating old banking tech infrastructure can be challenging, it’s clear that this is the future of finance.
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