Despite the scandal of the failure of the crypto exchange FTX, other American financial giants are establishing themselves in this sector. In August, PayPal created its own stablecoin – essentially a tokenized form of the US dollar. The new form of currency had the potential to “transform payments” in the emerging area of the Internet known as web3, PayPal said.
Cryptocurrencies, including bitcoin and ether, are capitalized to the tune of $1 trillion ($1.6 trillion). Markets for real-world assets – including real estate, derivatives, stocks, commodities and bonds – are much larger, with a valuation of around $800 trillion.
The Boston Consulting Group estimated last year that the market for tokenized assets could reach $16 trillion by the end of this decade. Larry Fink, chief executive of BlackRock, said last December “the next generation of markets and the next generation of securities will be the tokenization of securities.”
It is ironic that large financial institutions are developing the same technology that sought to eliminate them as middlemen when it launched during the global financial crisis in the form of Bitcoin. Indeed, Bitcoin’s pseudonymous inventor, Satoshi Nakamoto, complained in the first line of his white paper that “Internet commerce has come to rely almost exclusively on financial institutions serving as trusted third parties to process payments electronics”.
But 15 years after bitcoin’s creation, banks are realizing that its innovations can be deployed to help push traditional financial markets toward near-instant and free settlement, potentially cutting out middlemen such as ledgers and clearinghouses.
Delays in settling transactions in traditional markets locking in several billion dollars of regulatory capital. This could be freed up through blockchains, which can eliminate settlement risk.
Other investment banks are joining the rush. In January, Goldman Sachs announced that its digital asset platform was going live on a private blockchain built by Digital Asset. The European Investment Bank was the first institution to collaborate with the platform to issue its first digital bond.
Goldman Sachs said it would be used to reduce settlement times while improving issuance, registration and custody. “By reducing the typical settlement time of bond issues for the European Investment Bank from T+5 to T+0, to a speed of less than 60 seconds through cross-chain atomic “delivery versus payment” settlement, we showed how transformative this technology can be. be to financial markets,” said Mathew McDermott, global head of digital assets at Goldman Sachs.
JPMorgan is a pioneer in the field. Its Onyx blockchain already trades between $1 billion and $2 billion in digital assets every day, including tokenized residential mortgage-backed securities, money market funds, and U.S. Treasuries.
Down the rabbit hole
In Australia, major banks and regulators are also exploring tokenization. This year, the Reserve Bank has been testing various use cases for a central bank digital currency (CBDC) – a tokenized form of central bank currency known as eAUD – to help banks facilitate new activities based on blockchain.
ANZ and National Australia Bank created Australian dollar stablecoins, essentially a token deposit: the banks’ digital tokens represent funds held in trust by the banks that allows users to pay or receive Australian dollars on blockchain systems.
The movement raises a multitude of new challenges. One of them is market fragmentation, as liquidity is spread across different blockchain systems and ledgers that do not work with each other.
But Mastercard said this week it was working with the RBA to enable eAUD to move between different blockchains. ANZ said this month that it was working with Chainlink Labs and Swift, a global network of banks, to do the same with its stablecoin, A$DC.
There are also legal uncertainties that banks want to iron out. The Digital Finance Co-operative Research Centre, which developed the eAUD pilots with the RBA, wants the Treasury to expand its “token mapping” exercise – which until now has mainly focused on cryptocurrencies and uncollateralized tokens – to examine the tokenization of real-world assets. . Regulatory clarity on how digital assets will be treated in the law will give banks the confidence to continue investing to develop new markets, the group says.
“It should be much simpler to clarify the regulations for the tokenization of real-world assets, because the underlying assets already have an existing regulatory framework,” says Andreas Furche, CEO of the DFCRC.
“So, from a policy perspective, regulatory clarity for real-world token assets should be a relatively low-hanging fruit that yields significant economic benefits.
Andreas Furche will appear at AFR Crypto Summit Mondaywhere ANZ, NAB, Commonwealth Bank and the Reserve Bank will discuss the impact of digital asset tokenization on the Australian economy.