Despite the scandal of the failed FTX cryptocurrency exchange, other American financial giants are moving into that space. In August, PayPal created its own stablecoin, essentially a symbolic form of the US dollar. The new form of money had the potential to โtransform paymentsโ in the emerging area of โโthe Internet known as web3, PayPal said.
Cryptocurrencies, including bitcoin and ether, are capitalized at $1 trillion ($1.6 trillion). Real-world asset markets โ including real estate, derivatives, stocks, commodities and bonds โ are much larger, with a valuation of around $800 trillion.
Boston Consulting Group estimated last year that the market for tokenized assets could reach $16 trillion by the end of this decade. BlackRock CEO Larry Fink said last December โThe next generation for markets and the next generation for securities will be security tokenization.โ
Banks buy
It is ironic that large financial institutions are developing the same technology that sought to eliminate them as middlemen when it was launched during the global financial crisis in the form of bitcoin. In fact, bitcoin's pseudonymous inventor, Satoshi Nakamoto, complained in the first line of his white paper that โInternet commerce has come to rely almost exclusively on financial institutions acting as trusted third parties to process electronic payments.โ
But 15 years after bitcoin was created, banks are realizing that their innovations can be deployed to help drive major financial markets toward near-instant and free settlement, potentially eliminating intermediaries like registries and clearinghouses.
Delays in settlement of transactions in traditional markets tie up many billions of dollars in regulatory capital. This could be unlocked with blockchains, which can eliminate settlement risk.
Other investment banks are joining the race. In January, Goldman Sachs announced that its digital asset platform had gone 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. โBy reducing the typical settlement time of a bond issue for the European Investment Bank from T+5 to T+0, at a speed of less than 60 seconds with an atomic 'delivery versus payment' settlement across chains , we show how transformative this technology can be. be for financial markets,โ said Mathew McDermott, global head of digital assets at Goldman Sachs.
JPMorgan is a pioneer in the space. Its Onyx blockchain already trades between $1 billion and $2 billion in digital assets each day, including tokenized residential mortgage-backed securities, money market funds and U.S. Treasury bonds.
Down the rabbit hole
In Australia, large banks and regulators are also exploring tokenization. This year, the Reserve Bank has been testing several use cases for a central bank digital currency (CBDC), a symbolic form of central bank money known as eAUD, to help banks facilitate new businesses based on blockchain.
ANZ and National Australia Bank have created Australian dollar stablecoins, essentially a tokenized deposit: the banks' digital tokens represent funds held in trust by the banks that allows users to pay or receive Australian dollars on blockchain systems.
The movement is posing a plethora of new challenges. One is market fragmentation, as liquidity is divided between different blockchain systems and various non-interoperating ledgers.
But Mastercard said this week that it had been working with the RBA to allow eAUD to move across different blockchains. ANZ said this month it was working with Chainlink Labs and Swift, a global network of banks, to do the same with its stablecoin, the A$DC.
There are also legal uncertainties that banks are eager to resolve. The Digital Finance Cooperative Research Centre, which developed the eAUD pilots with the RBA, wants the Treasury to expand its โtoken mappingโ exercise, which to date has mainly focused on cryptocurrencies and unbacked 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 in the development of new markets, the group says.
โIt should be much easier to provide regulatory clarity for the tokenization of real-world assets because the underlying assets already have an existing regulatory framework,โ says Andreas Furche, CEO of DFCRC.
โTherefore, from a policy perspective, regulatory clarity for real-world tokenized assets should be relatively low-hanging fruit that enables large economic benefits.โ
Andreas Furche will appear in the AFR Crypto Summit on Mondaywhere ANZ, NAB, Commonwealth Bank and the Reserve Bank will discuss the impact of digital asset tokenization on the Australian economy.
