Incumbents Drive Tokenization: The Rise of Shared Ledgers and Network Integration
One of the trending themes at Fintech water coolers is Tokenization.`Blame` it on the FINK, who has been acting as the Bitcoin CMO and a Tokenization advocate over the past two years.
My YouTube short with the FINK on this topic from Dec 2022, is the most popular one to date (beating even Elon`s short on the Microsoft / OpenAI collaboration)
As Digital Assets have been a core thematic at the annual Point Zero Forum, the wide range of TAM projections of Tokenized Securities was discussed this year. The Point Zero Forum brings together a special mix of ecosystem players — Central bankers, Regulators, Policymakers, Industry leaders, Industry Associations, and Technologists — to discuss three core topics — Digital Assets, ESG, and exponential technologies (AI, and Quantum computing). The evolution of these topics will clearly impact our economies but more importantly, their full potential can only be realized if we develop standards.
On the bright side, these topics which are in their initial phases for the most part, bring diverse, key ecosystem players to the same table to discuss the challenges and opportunities and share ways to harness the potential and shape a future that `we all Love to Live in`.
The large variation in the TAM for tokenized securities is attributed to several factors, primarily the scope of assets expected to be tokenized — such as real estate, private equities, bonds, and green investments — and the assumptions around regulatory developments and the resulting adoption rate.
McKinsey recently projected the market to reach $2 trillion, while Standard Chartered estimates a much larger potential at $30 trillion. The Boston Consulting Group (BCG) on an earlier report had sized the market at $16 trillion, and digital asset manager 21.co forecasts a range between $3.5 trillion in a bear case and $10 trillion in a bull case by 2030.
These figures are in the trillions, and clearly, established capital markets players are not sleepwalking through this disruption. It is not only the FINK that foresees a substantial Tokenization wave. BlackRock has already started walking the talk with the issuance of the first Blackrock on-chain MMF issuance ($BUIDL which has accumulated $500+ Million in just four months, has become the №1 in that niche, and has increased the size of the Tokenized MMFs market to $1.81 Billion). Blackrock isn’t alone, HSBC has its own tokenization platform Orion, and recently issued a HKD6 billion-equivalent (c. $768 million) digitally native green bond for the Hong Kong government. The Hong Kong government has also issued a $100 million tokenized green bond using Goldman Sachs DAP, deployed on the privacy-enabled blockchain Canton. Goldman Sachs`s tokenization platform (GS DAP) also facilitated the issuance of a Digital bond for the European Investment Bank.
JP Morgan has its Onyx Digital Assets (ODA) platform and has tokenized existing traditional Blackrock MMFs on it. The DTCC made its first acquisition in a decade and acquired Securrency, a tokenization technology stack with built-in compliance.
Major players in private markets and alternatives, like iCapital, KKR, Hamilton Lane, Partners Group, are also involved. KKR has tokenized a few of its existing private funds (one on a public blockchain), and Icapital has launched a DLT for full-cycle management of private funds. The Canton Network went live during the PZF forum by issuing its coin Canton Coin.
To date, most of these institutional efforts involve private networks. The Canton Network seems to aim to connect these private networks and eventually create a permissioned but interconnected network between all these different tokenized asset registries and tokenized forms of cash.
The Canton network vision which has evolved since its launch last year
Canton is the first privacy-enabled open blockchain network, ensuring limitless connections that preserve privacy. Enabled by unique smart contract technology, network participants can confidently exchange data and value to unlock the potential of synchronized financial markets.
The Canton Coin is a utility token for the governance of the Canton network and is part of the so-called Global Synchronizer — the decentralized and transparent governance system. The way I understand it right now, is that there are validators on the Canton Network enabling secure and privacy-preserving connectivity between the different chains (e. g. The GS DAP platform, the HSBC Orion, the Daml, the DTCC, Copper.co, abrdn, Bank of America, etc). Some of the current Validators are Copper.co (Custodian), Digital Assets (Tech provider, Daml), SBI Digital Asset Holdings (Capital mkt. holdings company), Tradeweb (OTC e-trading), Gravity Team (algo trading in crypto), and more.
I am a big proponent of the transformation of Capital Markets to reduce major risks at the institutional level, offer transparency, and lastly unlock liquid and enable better capital allocation.
Right now, we are in the first phase of Tokenization. We will know that we have evolved to the next phase when we stop putting a press release for every single tokenization issuance (PZF water cooler).
The second phase will be completed when these tokenized securities (be it backed by real-world-assets RWAs, or not) become as liquid as traditional securities.
Reminder: Liquidity begets liquidity. Tokenized securities are not automagically liquid. Over the past couple of years, we have tokenized real estate, luxury cars, art, wine, hedge funds, private equity funds, money market funds; but none of these are liquid. To unlock liquid, there needs to be an entire ecosystem built to start with (I guess this is the Canton Network vision).
The dominant narrative around tokenization has been unlocking liquidity, increasing accessibility through fractionalization, and lowering costs. In addition, tokenization is expected and will eventually, allow for the creation of new products from efficiently bundling cash flows (similar to traditional financial securities, be it equities, fixed income, or funds), with certain rights (voting, options, seniority etc) and in some cases with experiences.
However, for now, the focus and interest of incumbents is specifically around improving Settlement (PZF water cooler). That is exactly what $BUIDL token offers to institutional investors (it is not a retail product). It can be used as collateral and can move on the Ethereum blockchain on which it is issued, and which settles every 3 minutes. This reduces intra-day settlement risks to a minimum.
The next level that can unlock value for institutional investors is at the price discovery level. Once OTC securities like bonds and private securities, are tokenized, price discovery will improve. I must emphasize here that this is theoretical because in the current landscape, we have too much fragmentation of blockchains that are not interlinked. Even if we tokenized $1 Trillion of fixed income securities for example, by year-end, they would be issued on a variety of private versions of Ethereum, Solana, or on the private blockchains of Goldman Sachs, HSBC, JP Morgan, Digital Assets, Kaleido, SBI DAH and the likes, and price discovery would improve only if Canton Network or some similar network manages to scale.
A new infrastructure that could have the potential to improve settlement and price discovery, was presented by MAS. The concept of the Global Layer One (GL1) is one of a multi-purpose, shared ledger infrastructure for regulated financial institutions. This infrastructure would be designed to support the deployment of interoperable digital asset applications across jurisdictions, governed by common standards and regulatory compliance.
Ravi Menon, Singapore’s Ambassador for Climate Action and former MD of MAS, was the keynote speaker at the PZF. His speech was clearly anti-crypto in my opinion and in the spirit of the BIS Finternet concept.
“The financial architecture of the future may well be one where a tokenised financial system co-exists seamlessly with a more traditional one. It is a vision that is by no means certain but well worth realizing — for what it means for economic efficiency, expanded opportunity, and financial inclusion,” Menon said.
Both the Finternet and GL1, are just white papers but they show the buy-in of the existing institutional ecosystem players. Finternet wants a unified ledger enabling the traditional and the natively on-chain world to co-exist in a compliant way of course. The GL1 concept aligns with a world that eventually fully transforms into the Digital Asset space with an emphasis on cross-border collaboration across jurisdictions. In a Finternet world, the emphasis is on authorized issuance of tokens to manage the unified ledger that is broader than that of the GL1 world.
Conclusion
Major financial institutions actively participating and driving Tokenizatton adoption. From BlackRock’s on-chain MMF issuance to HSBC’s Orion platform and JP Morgan’s Onyx Digital Assets, incumbents are not sleepwalking through this disruption. The Canton Network’s vision of connecting private networks into a permissioned, interconnected ecosystem is a significant step toward realizing the full potential of tokenized securities. The BIS Finternet concept and the MAS Global Layer One concept, are further evidence of the trend. These are complementing existing networks like Fnality. The institutional players are driven by the value-add around settlement risks.
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