(Bloomberg Opinion) -- The old tech mantra of "move fast and break things" has long been a guiding principle of the cryptocurrency movement. The only problem: too many things brokeleaving a series of high-profile bankruptcies and criminal prosecutions in its wake.
However, many of the torches lit in the โfast-movingโ phase are now being carried, albeit at a slower pace, by an unlikely group: the very traditional financial firms that cryptocurrency had hoped to disrupt. While none of this is quite as heady as the good old "Dogecoin to the moon" days, blockchain innovations are becoming more and more appropriated and refined for the duller, but very important task of optimizing parts of the Wall's plumbing. Street. Frequent crypto conference attendees have even noticed a change of clothes: Less hoodies, more suits and ties.
JPMorgan Chase & Co. last month expanded its blockchain-based payments platform to allow businesses customers to use euros, and the bank is exploring ways to expand an asset tokenization platform that has already traded more than $785 billion of notional value. Goldman Sachs Group Inc. is looking to increase the issuance of tokenized securities through the digital asset platform it launched in November. Institutional giants BlackRock Inc. and Fidelity Investments are among a number of companies that have applied for Bitcoin ETFs in recent weeks, while a cryptocurrency exchange recently launched backed by billionaire Ken's Citadel Securities Griffin, as well as Fidelity and Charles Schwab Corp..
Read more: Citadel Securities-backed cryptocurrency exchange, Fidelity goes live
"It may seem like it's all happening suddenly. But you're really seeing the fruits of many years of stepping out of the spotlight and solving the problems that we have from a regulated financial institution point of view," Tyrone Lobban, director of launch at blockchain and Onyx Digital Assets at JPMorgan, said of the bank's tokenization efforts.
The cascading chaos triggered by the failure of unregulated or lightly regulated crypto players like FTX may have helped create a new opportunity for traditional Wall Street firms. In a recent EY-Partheon survey of institutional investors, "regulatory clarity and oversight" as well as "proven and trusted financial entities to engage with" ranked as the two most important factors when making a significant asset investment. digital. โDecentralization,โ the goal of many crypto projects seeking to eliminate financial intermediaries, came in a distant seventh. And many of the efforts on Wall Street right now do the exact opposite: Instead of cutting out financial intermediaries, they're just trying to use blockchain technology to make transactions involving them more efficient.
โAlmost every week you see some banks or asset managers saying they are tokenizing this bond or this fund, we are doing this plan,โ he said. Prashant Kher, a senior director at EY-Parthenon focused on digital asset markets. "We're working with a lot of banks and asset managers behind the scenes to support a lot of that."
Make no mistake: Wall Street is not getting into the business of selling meme coins or trading the kind of cryptocurrencies that sparked US enforcement actions against companies like Coinbase Global Inc. because they are considered unregistered securities by regulators . Even companies focused on crypto itself, as opposed to those more specifically focused on using blockchain technology, are more dovish. EDX Markets, the recently launched cryptocurrency exchange backed by Citadel Securities, Fidelity, and Schwab, offers trading in just four currencies. On Fidelity's own platform, only Bitcoin and Ether are available. Wall Street seems happy to leave the wilder corners of the crypto market to the more die-hards.
Instead, the focus is on how real-world assets can be converted into digital tokens to create business efficiencies and develop new opportunities enabled by blockchain and smart contracts. Analysts at Citigroup Inc. estimates that by 2030, there will be up to $5 trillion in tokenized private sector securities and funds, ranging from corporate debt and financial collateral to alternative assets such as real estate, private equity and venture capital. By then, another $5 trillion could move into new types of money, such as central bank digital currencies and stablecoins.
Of course, there are plenty of examples of grandiose blockchain ambitions that turned out to be overblown. In 2015, Santander Innoventures โa fintech investment fund affiliated at the time with Banco Santanderโ and the consultancy Oliver Wyman foretold that blockchain could reduce infrastructure costs for banks by as much as $20 billion a year by 2022. Needless to say, that hasn't materialized. In a high-profile example, the Australian stock exchange ASX Ltd. in November announced that it was reassessing plans to replace its clearing and settlement platform with a blockchain-based system after several setbacks. The exchange said it would write off up to A$255 million ($168 million) in pre-tax costs related to the project.
Some obstacles to faster blockchain adoption have included caution among regulators and a scramble to generate interest in replacing unbroken systems and processes.
โWe have capital markets that have grown and developed over 100 years and nobody has really designed them to be the way they are and they have evolved over time,โ said John Whelan, managing director of crypto and digital assets at the corporate bank and Santander investment. . "But it actually works."
Santander, which together with Sociรฉtรฉ Gรฉnรฉrale and Goldman Sachs, led the issuance of a digital bond from the European Investment Bank in November, is also a shareholder in Fnality, a London-based company that develops digital versions of major currencies to be used in wholesale payments and digital securities transactions. That would allow for instant settlement of trades in assets like tokenized bonds. Like many other blockchain projects, Fnality has taken longer than anticipated. But a digital version of sterling is expected to launch by the end of the year, Fnality chief executive Rhomaios Ram said in an interview.
The previous flurry of blockchain testing and experimentation has also resulted in an unwelcome problem: a lack of interoperability between all the proposed new systems that threatens to make the systems they are trying to simplify even more complex.
"We ended up with a digital marketplace infrastructure that resembles spaghetti," said Hirander Misra, president and CEO of marketplace infrastructure company GMEX Group. , private or both types of blockchains".
Another hurdle has been the lack of participation from Wall Street clients, although that is beginning to change. โWe believe that if we can create more tokenization of assets and securities, and that's what Bitcoin is, it can revolutionize finance again,โ Larry Fink, CEO of BlackRock, said in an interview with Fox Business this week.
British asset manager abrdn has been working to tokenize its funds, including those on money markets and private markets, as well as integrate distributed ledger technology into its back-office processes. Other asset managers, including Hamilton Lane and KKR, have also been working on fund tokenizations.
"Why has it taken so long? The market needs to come together," said Duncan Moir, senior investment manager at abrdn's alternatives team. โWould you go to a market for a single product? Probably not. That market needs to have a menu for people to go through the pains of onboarding.โ
Goldman Sachs has been working with clients to create more tokenized securities across different asset classes using the digital platform it launched in November. Mathew McDermott, Goldman's global head of digital assets, can rattle off a long list of potential benefits for the company and clients. Settlement takes a fraction of the time. There are potential operating efficiencies, reduced risk, and more functionality, such as the ability to trade with more precision.
"What is important for key market stakeholders, including regulators, is to understand the business drivers for adopting this technology," McDermott said. โAnd as adoption increases, those business drivers will become more prevalent."
JPMorgan's Onyx Digital Assets platform enables financial institutions to create tokenized representations of traditional assets, such as US Treasuries, which can then be used as collateral in repo transactions, a foundation of the financial system on which they depend banks for short term loans. That tokenization allows operations to be scriptable, which means that the code can contain instructions for when redemptions are made. For example, a trade could be coded to last just three hours, and the cash lent against collateral is automatically returned to the lender once the time is up. In traditional repos, transactions are generally reversed at least one day after they were agreed.
Lobban said the platform is currently trading between $1 billion and $2 billion a day among counterparties, including other big banks. That's still a drop in the bucket when it comes to that market, but the long-term aspiration is to open up the platform to allow transactions where JPMorgan isn't a counterparty in all trades. The bank continues to add more clients and will look to expand use cases and collateral beyond Treasuries, Lobban said. JPMorgan is already finding savings and new sources of income, Lobban said.
"Once you see it, you can't unsee it," he said. "We've implemented some of these use cases and you can see it's faster, it's cheaper, it reduces back and forth."
--With the assistance of Olga Kharif and Muyao Shen.
To contact the authors of this story:
Anna Irrera in London at [emailย protected]
Michael P. Regan in New York at [emailย protected]
