Institutional digital assets: How can traditional financial products embrace blockchain?

Author: Annelise Osborne Source: coindesk Translation: Shan Ouba, Golden Finance

It is often said that the "crypto year" fits one year of innovation into a time span that usually takes seven years. Just like the Year of the Dog. That is, in the cryptocurrency era, institutions do not take action when it comes to adopting innovation. They test and build slowly behind the scenes, and these projects begin to bloom like flowers and cherry blossoms in spring.

The recent headlines are that the world's largest asset management company BlackRock, together with forward-thinking business minds, launched a blockchain-based tokenized fund backed by U.S. Treasury bonds (BUIDL) and launched on a public blockchain. Giants such as Franklin Templeton, Hamilton Lane and Wisdom Tree have tokenized the "40 Act" fund. KKR, Apollo and Hamilton Lane have also tokenized private equity funds. JPMorgan has demonstrated tokenization and real cost reductions in the repo market. Societe Generale, HSBC and Eurobank have all issued tokenized bonds. These are just a few.

Many proofs of concept are underway, such as Citi, WisdomTree and Wellington in the private markets space. Project Guardian brings together a host of banks and counterparties to revolutionize wealth management. DTCC, SWIFT, BlackRock, Barclays, JPMorgan, Barclays, Citi, Vanguard and many others have tried it in settlement and clearing. The list is more extensive, but you get the idea.

Capital market efficiencies have been and are being made through the use of blockchain technology and digital assets. This is not a passing fad.

Let’s dive into two key use cases: 1. Digital currencies or stablecoins; and 2. Tokenization of traditional investment opportunities, often referred to as “real world assets” (RWAs).

Stablecoins: Like Lightning

A stablecoin is a cryptocurrency designed to have a “stable” value, typically backed by a currency or stable asset. The backbone of capital markets is money, and stablecoins are digital replicas of money. Like all cryptocurrencies, stablecoins transfer ownership instantly, rather than settling or floating later. They are also programmable. Stablecoins have a market cap of up to $157 billion.

Since the adoption of credit cards and the shift to debit cards and mobile wallets, reliance on cash or fiat currencies has significantly decreased. For point-of-sale retail in 2023, cash payments in the U.S. will account for only 12% of transactions. Most bank transfers, salary payments, and bills are a series of numbers transferred between banks and accounts, not truckloads of $100 bills or gold bars. How much cash do you have on hand?

More importantly, financial markets are global. Stablecoins open a window to 24/7/365 market hours. Institutional interest in stablecoins can be highlighted through settlement, fund management, and cross-border payments.

The Federal Reserve is offering an instant payment service, FedNow, to banks, highlighting that the floating period of fund transfers is an issue. The launch has received mixed reviews and does not provide the flexibility of programmable money that stablecoins have. The Federal Reserve and the Treasury Secretary have been studying central bank digital currencies (CBDCs), which would be digital assets.

JPMorgan has an internal stablecoin, JPM Coin, which is backed by depositary receipts and can be used within the bank for payment transfers and settlements. JPM Coin has reached $1 billion in trading volume per day and is expected to save $20 million on repo transactions in 2023.

Societe Generale has launched a euro-denominated stablecoin, SG-FORGE, which is on a public blockchain and available on the BitStamp exchange.

PayPal launched a stablecoin (PUSD) to its 435 million customers last year, allowing them to exchange the stablecoin for Bitcoin and pay for retail purchases. Soon, it may enable cross-border payments.

Figure Technologies is issuing an interest-bearing stablecoin denominated at $0.01 per token. The stablecoin requires KYC/AML whitelisting and SEC approval. The structure looks similar to the Arca U.S. Treasury Fund, which issued ArCoin, a tokenized low-volatility security backed by U.S. Treasuries.

Recently, U.S. lawmakers proposed a stablecoin regulation bill that would require one-to-one financial backing for stablecoins and ban algorithmic stablecoins.

Built on BUIDL

With the world’s largest asset manager tokenizing its first fund, the market is starting to pay closer attention. Tokenization entails issuing a digital representation of an asset or instrument. It’s exciting to see institutions turn what the digital asset world has been talking about since 2018 into reality.

The initial big step was tokenizing the 40 Act Fund and thinking through the thought process of improving efficiency. Over $1 billion of US Treasury funds have been tokenized. Franklin Templeton reports that their 40 Act Fund “continues to improve operational efficiencies through the use of blockchain-integrated systems, including increased security, faster transaction processing, and reduced costs for the benefit of fund shareholders.”

Tokenized bonds are more common outside the US due to regulatory uncertainty. HSBC tokenized HK$600 billion of government bonds issued in four different currencies. Natively digital bonds reduce settlement time from five days (T+5) to one day (T+1). Ratings agency Moody’s has rated many tokenized bonds, adding to their legitimacy. Tokenized mortgages are already emerging in the U.S. The largest in the field is Figure Technologies, which not only tokenizes HELOCs and mortgages, but also rates tokenized securitizations. They have also launched the DART system, which is both a lien and an electronic note registry, aiming to break the MERS’ current stranglehold on the $19.3 trillion U.S. mortgage market. Even investment banks are offering tokenization services to their clients, notably Citi and Goldman Sachs. And this is just the beginning. Institutions are building and offering digital asset tokenized products. The benefits of blockchain technology are something that capital markets and institutions cannot ignore. Change is hard, and so is upgrading old banking technology infrastructure. But this is the future of finance.