Original author: Steven Ehrlich
Carbon Chain Value Note: The RWA mentioned in this article is equivalent to the tokenization mentioned in the article.
On July 17, 2023, two partners from the consulting firm McKinsey took to the podium at the New York Stock Exchange to introduce the appeal of blockchain to dozens of government regulators and financial executives, insisting that its uses go far beyond Look beyond the scandal-plagued cryptocurrency market.
Since peaking in November 2021, the prices of Bitcoin, Ethereum, Solana and more than 10,000 other cryptocurrencies have fallen by 60%, losing $2 trillion in market capitalization.
While earlier on Tuesday, the price of Bitcoin surpassed the $34,000 mark for the first time since May 2022, buoyed by expectations that a Bitcoin exchange-traded fund (ETF) will be launched soon, but this is because this ETF Investors in the stock market will be allowed to invest in Bitcoin without directly holding the volatile cryptocurrency, and will no longer need to rely on cryptocurrency exchanges or set up cryptocurrency wallets.
Cryptocurrency platforms are also frequently targeted by hackers, and the most important companies have been grilled and investigated by regulators. But even so, the two advisers insist that the technology behind the digital currency is still viable and the future is bright.
This is blockchain, not cryptocurrency, and it has real utility, claimed McKinsey partner Julian Sevillano.
Advisors covered the basics of blockchain, defining digital terms such as smart contracts (transactions that automatically execute when specific conditions are met), and explaining how traditional financial assets such as stocks, bonds and real estate can be converted into tokens. ization, that is, giving them blockchain code so that they can change hands around the world in seconds instead of hours or days as they do now.
However, although they have been talking about improving capital efficiency, saving operating costs and enhancing compliance and transparency, their speech is still somewhat hollow.
Aside from mentioning last year’s disastrous cryptocurrency price crash, the speech could have been delivered in 2015, when the first tokenization platforms like R 3 CEV were just launching. Since then, only a few businesses have adopted the technology, and many projects still face the same challenges and arguments as last year. Tokenization may still be the future of financial services, but it seems very far away.
To illustrate this point, we need only look at the subsequent presentation to the CFTC Global Markets Advisory Committee.
Per von Zelowitz of the New York Fed Innovation Center told the audience that their wholesale deposit pilot project operating on a private network in partnership with banks such as Wells Fargo and Citigroup remains theoretical financial market infrastructure. science experiment.
When it came time for the QA, another speaker, Sandy Kaul of asset manager Franklin Templeton, asked if the Fed had considered testing on an open system to leverage Various benefits that a blockchain-like environment can provide.
Like? Zelowitz replied.
The promise of “tokenization”
Ever since Satoshi Nakamoto’s white paper describing Bitcoin went viral on Halloween night 2008, cryptography has burst onto the scene and spawned a slew of programs that were supposed to be killer apps. The promises promised by such apps include instant payments at extremely low prices anywhere in the world, tools to protect identities and personal information from the prying eyes of regulators and businesses, and tools to hedge against inflationary government policies.
Also included in the promise is tokenization, the digital receipt of real-world assets such as real estate, art, bonds and even intellectual property. Early attempts at tokenization focused on private ledgers, which are blockchains controlled by an entity or consortium of companies and have no element of public verification. On the face of it, this alternative offers the speed and transparency of blockchain without the risk of criminals using the platform for illicit purposes.
Then things really kicked off in 2015, when these high-profile permissioned ledgers were launched, all with lofty ambitions, often backed by big banks, to use blockchain technology to simplify everything from payments to All processes to backend settlement. Even IBM began investing heavily in blockchain, with a glossy marketing plan (although the company later switched to touting its artificial intelligence capabilities).
Even Nasdaq has launched a project to use a permissioned blockchain to facilitate the sale of privately issued “tokenized” securities. A 2015 report from Banco Santander’s venture capital arm stated that “distributed ledger technology could reduce banks’ cross-border payment, securities trading and regulatory compliance costs by $15 billion to $20 billion by 2022.” .” Now, 2022 is behind us, but the banking industry is not feeling any noticeable changes.
The development history of “tokenization”
The most high-profile early foray into tokenization came in March 2015 when a New York startup called Digital Asset Holdings (DAH) hired Blythe Masters as CEO.
As early as the early 2000s, Masters, then a 28-year-old executive at JPMorgan Chase, conceived of credit-default swaps, a way for bond investors to hedge against the risk of borrowers not paying back their debts. A clever tool that later became infamous during the 2008 financial crisis. Masters aims to inspire widespread adoption of blockchain technology to revolutionize financial markets. You should take this technology as seriously as you took the development of the Internet in the early 1990s, he told Bloomberg in 2015.
Masters and DAH had early success in 2017, when the company won a contract to replace the ASXs outdated clearing and settlement system. But problems arose with the deal, and the project was hampered by delays in stability, scalability, governance and overall project management until it was canceled outright at the end of 2022. The exchange also canceled a $165 million investment in the company DAH. Chairman Damian Roche said: “We embarked on this project based on the latest information available at the time, determined to provide the Australian market with a post-trade solution that balances innovation and state-of-the-art technology while being safe and secure. technology. However, upon further review, we have concluded that the path we are taking will not be consistent with the high standards of the ASX and the market.
Of all the industry-tokenization crazes of the past decade, perhaps the most memorable project was the $18 million sale of a stake in the St. Regis hotel in Aspen, Colorado, which was viewed as a joke within the industry. Will Peck of WisdomTree Investments said: “Realistically, no one wants to hold a thousandth of a floor in a hotel or a painting in tokenized form.”
Fast forward to today, and tokenization proponents are still struggling to implement the concept. Projects range from hundreds of millions of dollars of bonds issued in Europe to Robinhood-style investing apps that would theoretically allow nerds to buy tokenized U.S. Treasuries with as much effort as changing the channel on their televisions. . At best, these programs can work in small doses and in controlled settings, but none have yet cracked the code to generate widespread demand.
Take the institutional market as an example. In November 2022, Goldman Sachs launched a tokenization platform that worked with Santander and Société Générale to handle a $100 million euro bond issued by the European Investment Bank. “This move has many different aspects.” Groundbreaking, said Matthew McDermott, managing director of Goldman Sachs investment business. For example, its settlement cycle is 60 seconds instead of the European Investment Banks traditional five days, which reduces the risk of clerical errors. and make assets more liquid.
The system can even handle interest payments on bonds. McDermott said: “We actually used blockchain to track derivative cash flows and verified the viability of payment channels with Banque de France and Luxembourg Bank, both of which have created wholesale digital currencies for the project. .” But so far, the platform has only completed two small transactions.
Tokenization: trend or useless?
McDermott told Forbes that Goldman Sachs is looking to package bonds issued by the European Investment Bank with other products to create a liquid secondary market. However, this is easier said than done, because such drastic measures require more infrastructure, and it also requires gathering practitioners to adopt a unified set of technologies, which means that competitors need to work together to cooperate-and this has always been the case. Its a big problem.
Nadine Chakar, then CEO of tokenization company Securrency and who previously ran the digital assets division of State Street, said: “Whether it’s at BlackRock and Goldman Sachs, Citigroup or JPMorgan Chase, All employees are saying tokenization is the wave of the future. Her company was recently acquired by the Depository Depository and Clearing Corporation (DTCC) for $50 million, the same time it raised its last round of venture capital in March 2021 50% discount compared to current value. “The problem is interoperability and liquidity. The bank partners with a company, issues a bond, and then puts out a press release. What happens next? Nothing happens. These bonds are like stone pets, and it’s difficult to sell them in the market. circulation, Chakar said in July this year.
Before the acquisition, Securrency took a different approach. It has partnered with WisdomTree to launch a series of tokenized funds on public blockchain platforms such as Ethereum and an app called WisdomTree Prime to provide low-cost investment access to stock index tracking funds and Treasury bonds, and to invest in are widely open. These funds have a minimum investment of $25 and expense ratios as low as 0.05%. While this fee rate is still expensive compared to the zero-fee trading offered by platforms like Robinhood (which benefits from the controversial order flow payment model), WisdomTree is betting on this, believing that customers are seeking this alternative investment solution . As of now, these tokenized funds are still operating, but the total assets of the nine funds are only $12 million, and neither WisdomTree’s Chakal nor Peck responded to questions about the future development of the funds.
Franklin Templeton Funds is also offering similar products through a retail investing app called “Benji,” which in addition to digital assets offers money market funds backed by U.S. government securities. Franklin Templeton currently has $295 million in assets under management in this category.
Alternative assets such as private credit and equity may be the asset types most promising for tokenization. U.S. Commodity Futures Trading Commission Commissioner Caroline Pham said private credit is expected to become a $10 trillion market within the next 10 years.
Some initial attempts at tokenization have proven successful in speeding up bond issuance and lowering barriers to investment — for example, KKR partnered with a tokenization company called Securitize to issue its value on the Avalanche blockchain as part of the $4 billion Healthcare Strategic Growth II fund (HCSG II), but neither company would say how much money was raised that way. Avalanche appears to be making a big push towards tokenization as it joins forces with asset managers T. Rowe Price, WisdomTree, Wellington Management and Cumberland DRW to launch a test network that will allow traditional financial firms to clear and settle trades on a blocked part of the public blockchain .
However, there are still practitioners who believe that there is no need to go the tokenization route, so these tokenization projects still have a long way to go before they can make significant progress. For example, iCapital created a series of feeder funds with a minimum investment of $25,000 to fund alternative investments, but saw no need to use blockchain in the process. Lawrence Calcano, CEO of the company, said: “We have reached a certain scale in the business, but we have not tokenized anything. The idea that someone has to tokenize to grow is not Correct; but the two are not mutually exclusive factors.
To date, the only relatively successful use of tokenization has been stablecoins, which are typically 100% collateral-backed and designed to maintain the value of $1. The global stablecoin market has swelled to $127 billion in just a few years, yet the primary use of stablecoins has been to facilitate speculative trading on unregulated cryptocurrency exchanges around the world, many of which do not accept payments in traditional currencies. Furthermore, the market is dominated by Tether, a gray institution that has long operated outside of regulatory scrutiny. Tether, which holds $84 billion in U.S. dollar stablecoin assets, has never been audited and has declined to name the banks that host its funds.
However, tokenization pilots continue and press releases continue to come out. Just in the past few weeks, payment information services company Swift released the results of a pilot with BNP Paribas, DTCC, BNY Mellon and Lloyds Banking Group. Designed to determine whether the back-end systems of the aforementioned banks can connect to public and private blockchains that support tokenized assets; Citibank has also announced a plan to begin tokenizing customer deposits with the bank so that customers can Transfer funds instantly anywhere in the world without time constraints. The initial pilot was conducted in partnership with shipping giant Maersk, a client of the bank.
The London Stock Exchange also hopes to launch tokenized trading operations, but may focus on opaque private equity assets first. However, like a broken record, Murray Roos, head of capital markets at LSE Group, just keeps repeating comments made by the ASX years ago, saying technology Having reached an inflection point, the idea is to use digital technology to make the process smoother, cheaper, more transparent... and to regulate the process.
In the next 18 to 24 months, we will definitely make a difference, said Securrency CEO Chakar.
Doing the same thing over and over again and expecting different results is something we might call crazy. From a blockchain technology perspective, the tokenization of trillions of real-world assets in the future is just around the corner. However, as long as investors don’t trust the cryptocurrency market, this will never happen.
