Institutional Digital Assets: The Future of Finance is Here

Annelise Osborne is the author of "From Hoodies to Suits: Digital Asset Innovation in Traditional Finance," to be published in June 2024. Source: CoinDesk; Compiled by: Five Baht, Golden Finance

The “Year of Crypto” is often thought of as compressing one year of innovation into a time span that would normally take seven years. That is, when it comes to adopting innovations, institutions won’t act in a crypto year. As they test and slowly build behind the scenes, the projects begin to bloom like spring flowers and cherry blossoms.

Recent headlines are that BlackRock, the world’s largest asset manager, joins forces with forward-thinking business minds to launch a U.S. Treasury-backed (BUIDL) and launch on a public blockchain of blockchain-based tokenized funds. Giants like Franklin Templeton, Hamilton Lane, and WisdomTree have tokenized “40 Act” funds. KKR, Apollo and Hamilton Lane have also tokenized private equity funds. JPMorgan has demonstrated tokenization and real cost savings in the repo market. Société Générale, HSBC and European banks have all issued tokenized bonds. But these are only a few.

Many proof-of-concepts are underway, such as the collaboration between Citi, WisdomTree and Wellington in the private markets space. Project Guardian brings together banks and counterparties to revolutionize wealth management. DTCC, SWIFT, BlackRock, Barclays, JPMorgan Chase, Barclays, Citigroup, Vanguard and many other institutions have made attempts in settlement and clearing.  

Capital market efficiency has been and is being achieved through the use of blockchain technology and digital assets. This isn't a passing fad.

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

Stablecoins: Like lightning

Stablecoins are a A cryptocurrency that aims to have a "stable" value, usually backed by a currency or stable asset. The backbone of capital markets is currency, and stablecoins are digital copies of currencies. Like all cryptocurrencies, stablecoins transfer ownership immediately rather than settling or floating later. They are also programmable. Stablecoins have a market capitalization of $157 billion.

Reliance on cash or fiat currency has decreased significantly since the adoption of credit cards and the shift to debit cards and mobile wallets.   In 2023, cash payments will account for only 12% of transaction volume in the United States. Most bank transfers, payroll payments, and bills are a series of numbers moving between banks and accounts, not a truckload of $100 bills or gold bars. How much cash do you have on hand?

More importantly, Financial markets are global. Stablecoins open a window for 24x7x365 market hours. Institutional interest in stablecoins can be highlighted through settlement, treasury management and cross-border payments.

The Federal Reserve is offering FedNow, an instant payments service to banks, highlighting the issue of float on money transfers. The launch was met with mixed reviews and did not offer the flexibility of programmable money that stablecoins offer. The Federal Reserve and the Treasury Secretary have been studying a central bank digital currency (CBDC), which would be a digital asset.

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

Société Générale has launched SG-FORGE, a euro-denominated stablecoin that is on a public blockchain and available on the BitStamp exchange.

PayPal launched its stablecoin (PUSD) last year to its 435 million customers, 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 priced at $0.01 per coin. The stable requires KYC/AML whitelisting and SEC approval. The structure looks similar to the Arca U.S. Treasury Fund, which issues ArCoin, a tokenized low-volatility security backed by U.S. Treasuries.

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

Built on BUILD

As the world’s largest asset manager puts its first When funds are tokenized, the market begins to pay more attention. Tokenization requires the issuance of a digital representation of an asset or instrument. It’s exciting to see institutions bring to life what the digital asset world has been talking about since 2018.

The first big step was to tokenize the 40-Bill fund and consider the thought process of increasing efficiency. Tokenized U.S. Treasury funds have exceeded $1 billion. Franklin Templeton reports that their 40 Act fund "continues to improve operational efficiencies through the use of blockchain-integrated systems, including improved security, faster transaction processing and lower costs, benefiting fund shareholders."

Tokenized bonds are more common outside the United States due to regulatory uncertainty. HSBC tokenized HK$600 billion in government bonds issued in four different currencies. Born 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 mortgage loans have emerged in the United States. The largest in this space is Figure Technologies, who tokenize not only HELOCs and mortgages, but also ratings tokenized securitization. They also launched the DART system, which is both a lien and an electronic note registry designed to break MERS’ current monopoly on the $19.3 trillion U.S. mortgage market.

Even investment banks are offering tokenization services to their clients, notably Citigroup and Goldman Sachs. And this is just the beginning.

Institutions are building and offering digital asset tokenization products. The benefits of blockchain technology cannot be ignored by capital markets and institutions. Change is difficult, and so is upgrading old banking technology infrastructure. But this is the future of finance.