Forbes: After repeated defeats, the 8-year quest for asset tokenization
Original article by Steven Ehrlich, Forbes
Original compilation: Luffy, Foresight News
Despite blockchain’s disruptive promise, it’s business as usual at the New York Stock Exchange
On July 17, 2023, two partners from the consulting firm McKinsey Company took the stage at the New York Stock Exchange to speak to dozens of government regulators and financial executives about the charm of blockchain, insisting that its utility goes far beyond the scandal-ridden cryptocurrency market.
Bitcoin, Ethereum, Solana and tens of thousands of other cryptocurrencies are down 60% from their peak in November 2021, losing $2 trillion in market value. Cryptocurrency platforms are regularly attacked by hackers, and the most important crypto companies are clamped down by regulators. Even so, evangelists insist that the technology behind cryptocurrencies is still viable and has a bright future.
This is blockchain, not cryptocurrency, and it has real utility, said Julian Sevillano, a partner at McKinsey.
Evangelists cover the basics, defining crypto terms like “smart contracts” (transactions that automatically execute when certain conditions are met), and explaining how traditional financial assets like stocks, bonds, and real estate can be “tokenized.” Blockchain code could allow them to be transferred around the world in seconds instead of the hours or days it takes today.
But for all their talk of “improving capital efficiency,” “saving operating costs,” and “enhancing compliance and transparency,” their speeches still feel somewhat hollow. Without mentioning the catastrophic collapse in cryptocurrency prices last year, this speech could have been delivered in 2015, when the first tokenization platforms such as R 3 CEV were announced. But few businesses have since adopted it, and many projects still face the same challenges and arguments as before. Tokenization may be the future of financial services, but it still seems far away.
For proof of this, look no further than a subsequent report to the Commodity Futures Trading Commission’s Global Markets Advisory Committee. Per von Zelowitz of the New York Fed Innovation Center told everyone that the batch deposit pilot project running on a private network in conjunction with banks such as Wells Fargo and Citigroup remains a scientific experiment in theoretical financial market infrastructure.
During the QA session, another speaker, Sandy Kaul of the $1.5 trillion asset manager Franklin Templeton, asked the Fed if it had considered testing on open systems to take advantage of the various capabilities offered by blockchain technology. Advantage.
Like what? Zelowitz replied.
Since the Bitcoin white paper released by Satoshi Nakamoto on Halloween night in 2008 became widely circulated, encryption technology has had a series of killer applications told in cycles. They include instant payments anywhere in the world, tools to protect identities and personal information from the prying eyes of regulators and businesses, and government policies to hedge against inflation.
Also on this merry-go-round is the tokenization, digital receipt, of real-world assets such as real estate, art, bonds, and even intellectual property. Early tokenization efforts have focused primarily on private ledgers, which are blockchains controlled by an entity or consortium of businesses and without the DNA of public verification. This alternative ostensibly offers the efficiency and transparency of blockchain without the risk of criminals using the platform for illicit purposes.
Things really started to kick off in 2015, when a series of high-profile licensed ledgers emerged with lofty ambitions. They are often backed by big banks and use blockchain technology to streamline everything from payments to back-office settlement. IBM also relied heavily on blockchain and launched a flashy marketing plan (the company has since turned to promoting its artificial intelligence business).
At the same time, Nasdaqstart uphas launched a project to use permissioned blockchain to facilitate the sale of privately issued “tokenized” securities. A 2015 report from Santanders venture capital arm said that distributed ledger technology could reduce banks costs in cross-border payments, securities trading and regulatory compliance by $15 billion to $20 billion by 2022. A year came and went without any noticeable impact.
The most high-profile early tokenization exercise occurred in March 2015, when a New York-based startup called Digital Asset Holdings (DAH) hired Blythe Masters as its CEO. In the early 2000s, when he was a 28-year-old J.P. Morgan executive, Masters conceived of credit default swaps, an ingenious tool for bond investors to hedge against the risk of borrowers not paying back that became popular during the 2008 financial crisis. Notorious. Masters wants to inspire widespread adoption of blockchain technology to revolutionize financial markets. You should take this technology seriously, just like you should take the development of the Internet in the early 1990s seriously, he told Bloomberg in 2015.
Masters and DAH achieved initial success in 2017 when the company won a contract to replace the ASXs outdated clearing and settlement system. But due to delays in stability, scalability, governance, and overall project management, the deal languished until the end of 2022, when it was called off. The exchange wrote off $165 million of its investment, and chairman Damian Roche said, “We initiated this project using the latest information available at the time, determined to provide the Australian market with a safe and reliable post-trade solution that balances innovation and advanced technology. However, upon further review, we have concluded that the path we are taking will not meet the high standards of the ASX and the market.
For all the hubbub over industry tokenization over the past decade, 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, “No one really wants to hold a thousandth of a floor in a hotel or a painting in tokenized form.”
To this day, tokenization proponents are still trying to get the concept off the ground. Projects range from hundreds of millions of dollars in European bond issuance to a Robinhood-style investing app. These apps make it easy for couch potatoes to buy tokenized shares of U.S. Treasuries without any more effort than changing TV channels. The best we can tell right now is that they work in small doses and in controlled environments, but the code to create widespread demand has not yet been cracked.
Take the institutional market as an example. In November 2022, Goldman Sachs launched a tokenization platform that worked with Santander and Societe Generale to handle a $100 million Eurobond issued by the European Investment Bank. Managing director Matthew McDermott said the platform was groundbreaking in many ways. The settlement cycle is 60 seconds instead of EIBs traditional 5 days, reducing the risk of clerical errors and making assets more liquid.
The system can even handle interest payments on bonds. “We actually represent derivative cash flows on-chain and prove that you can interoperate with the payment channels of the Bank of France and the Bank of Luxembourg, both of which minted batches of digital currency for the project,” McDermott said. But only two small deals have been completed so far.
McDermott told Forbes the bank is looking to package the EIB offering with other companies to create a liquid secondary market. This is easier said than done as such a move would require more infrastructure as well as bringing industry players together around a set of technologies, which has been a major hurdle as it requires competitors to work together.
“Everyone from BlackRock to Goldman Sachs, Citi and JPMorgan is saying tokenization is the future,” said Nadine Chakar, then-CEO of tokenization firm Securrency, who previously ran digital assets for Bank of New York Mellon. department. Her company was recently acquired by the Depository Trust Clearing Corporation (DTCC) for $50 million, which was only 50% of the company’s valuation at the time of its last venture funding round in March 2021. “The problem is interoperability and liquidity,” Chakar said in July. “Banks work with XYZ company for an issuance and then put out a press release. What happens next? Nothing happens. They become pet rocks because they don’t go anywhere. can not go.
Before Securrency was acquired, it took a different approach. It has partnered with WisdomTree to launch a series of tokenized funds on public blockchains such as Ethereum and an app called WisdomTree Prime, which provides a low-cost investment method for stock index tracking funds and Treasury bonds, and has broad accessibility. These funds have a minimum investment of $25 and an expense ratio of 0.05%. While this is still more expensive than zero-fee trading offered through platforms like Robinhood (which benefits from a controversial pay-per-order flow model), WisdomTree believes customers are looking for alternatives to Robinhood. As of now, the funds are still operating, but the nine funds have total assets of just $12 million, and neither WisdomTrees Chakar nor Peck responded to questions about their futures.
Franklin Templeton offers similar services through a retail investing app called Benji, which, in addition to digital assets, offers investments in money market funds backed by U.S. government securities. Franklin Templetons product has $295 million in assets under management.
Alternative assets such as private credit and equity may be the best hope for tokenization. CFTC Commissioner Caroline Pham said private credit is expected to become a $10 trillion market within the next 10 years.
Some initial tests have proven that tokenization is successful in speeding issuance and lowering investment barriers, such as KKR partnering with a tokenization company called Securitize to issue its $4 billion healthcare strategy on the Avalanche blockchain Growth Fund II (HCSG II), but the company will not disclose the exact size of the investment.
Avalanche appears to be pushing hard into the tokenization space, joining forces with asset managers T. Rowe Price, WisdomTree, Wellington Management and Cumberland DRW to launch a testnet that lets traditional financial firms clear and settle trades on a public blockchain in a sandbox .
But the plan still has a long way to go before significant progress is made by industry incumbents who see no need to go the tokenization route. For example, iCapital created a series of mutual funds with minimum amounts of $25,000 to provide capital for alternative investments, but did not see the need to use blockchain in the process. The business has reached scale, but we havent tokenized anything yet, CEO Lawrence Calcano said. The idea that companies need tokenization to grow is incorrect, but they are not mutually exclusive.
To date, stablecoins are the only application that has seen some success with tokenization. The global stablecoin market has swelled to $127 billion in just a few years, but the primary purpose of the tokens—which are typically backed by 100% collateral and designed to maintain the value of $1—has been to facilitate unregulated crypto around the world Speculative trading on currency exchanges. Many countries around the world do not accept payments in traditional currencies. Additionally, the market is dominated by Tether, a shadow company that has long operated outside of regulatory scrutiny. Tether, which has $84 billion in stablecoin assets, has never been audited and refuses to name the banks it uses to store funds.
Nonetheless, tokenization pilots and news continue. Just in the past few weeks, payments messaging service Swift has announced deals with BNP Paribas, DTCC, BNY Mellon and Lloyds Banking GroupExperimental resultsto determine whether their back-end systems can connect to public and private blockchains that support tokenized assets; Citi announced a plan to begin tokenizing the bank’s customer deposits so that customers can transfer them anywhere in the world Send funds instantly. The initial pilot was conducted jointly with shipping giant Maersk, a client of the bank.
The London Stock Exchange also hopes to launch a tokenized trading operation, which may first focus on opaque private equity. Like breaking records, Murray Roos, head of capital markets at London Stock Exchange Group, echoed comments made by the ASX years ago, saying the technology had reached an inflection point, The idea is to use digital technology to create a smoother , cheaper, more transparent processes and regulating them.”
In the next 18 to 24 months, we have to make some changes, Securrency CEO Chakar said.
Its crazy to do the same thing over and over again and expect different results. From a technology perspective, the future of blockchain tokenization of trillions of real-world assets is just around the corner, but as long as trust in the crypto market is non-existent, this will never happen.
