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The New Era of Blockchain Interoperability in Capital Markets
Old treasure map with nautical navigation equipment, coins and pearls.
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The number of new industry announcements related to digital asset use cases, partnerships, network collaborations and PoCs in capital markets in recent months is impressive.
From last fall’s digital asset playbooks at a frenetic pace of new launches included JP Morgan collaboration with Ownera, HQLAx and Wematch multi-leder intra-day repoHSBC’s $750 million HKMA issuance of digital green bondsBlackrock Tokenized money market fund (MMF) and recently, Broadridge using JPM Coin to establish your own repo network, it can be difficult to keep up with the details.
We are ushering in a new era of digital assets in the capital markets and the starting signal for interoperability has been fired. Now it’s about connecting the “new product islands” in capital markets with the next generation of digital financial market infrastructure (dFMI). No closed “walled garden” ecosystems here, it’s all about the “network” and open ecosystems with much of the new dFMI powered by distributed ledger technology (DLT).
The dIMF may not be the most exciting conversation at the cocktail party, but it’s good for investors’ pockets. Web3 in Capital Markets will allow you to buy and sell stocks, bonds, funds and commodities faster and cheaper, with better margin accounts and greater collateralization opportunities. The promise of providing investors with universal access to assets such as property, art, wine, through ownership subdivision, is also not far away.
The biggest obstacle to the expansion of institutional tokenization lies in the misalignment between supply and demand, exacerbated by the fragmentation of regulated services required by both.
Connected sell-side production use cases
Cantonal networks, launched a year agoand with more than 85 companies now participating in the network, it has conducted an interoperability pilot and recently published the results. THE relationship concluded that DLT interoperability will be driven by the value of real connections: where institutional liquidity flows, adoption will follow. Canton is connecting companies in the network through the application of real production use cases.
Yuval Rooz, CEO and co-founder of Digital Asset, says: “Up to this point, the discussion around interoperability in blockchain has largely focused on what is theoretically possible. What’s most exciting to me right now is that we’re seeing the move to use cases that deliver tangible returns, like the work we’re doing with JP Coin and Broadridge as tokenized assets and securities enter the ledger payments space. “
Collateral mobilization is now the greatest opportunity. Canton Network participants are looking for solutions that have the appropriate rights, obligations and connectivity between market participants and liquidity to deliver real-time DVP and measurable business value.
“Proofs of concept demonstrate what is possible and serve to educate the market, but we are focused on production use cases that are viable within the current regulatory framework,” adds Rooz.
To encourage widespread market adoption, the buy side is also starting to see some of the benefits of these efficiencies. This includes faster access to new markets, broader liquidity, new tokenized products and services, and the ability to mobilize more assets for use as collateral or for securities financing.
Buy Side Blast Off
Archax, the UK’s first FCA-regulated digital asset exchange, broker and custodian, recently announced that it has expanded the range of fund shares it offers in tokenized form with the provision of US Treasury MMF BlackRock ICS. This is based on the launch of tokenized access to Abrdn MMFs last year, which Archax created on both the Hedera and Ethereum blockchains.
The BlackRock MMF, along with existing offerings, are all available directly on the Archax platform, as well as through connected networks. The first transaction of tokenized shares of the BlackRock FCM has been completed through the digital asset network Ownera FinP2P.
Graham Rodford, CEO and co-founder of Archax, comments: “In today’s high interest rate environment, making liquidity, treasury and stablecoins work is more important than ever. MMFs are a useful vehicle as they have the potential to provide institutional stability and yield, thanks to their underlying investments in short-term debt products, and reduce the counterparty risk of an individual bank or stablecoin provider.
“Additionally, through the creation of a secondary market for tokenized instruments, investors gain the benefit of near-instantaneous transfer of MMF shares throughout the day, a benefit that can also see the tokens used for yield-bearing collateral movements as well.”
The universal router
The industry has invested millions in developing tokenized assets in silos, integrating regulated services into their frameworks. Typically, if an investor wants to purchase an asset from a specific tokenization platform, he or she must also register with that platform, completing the necessary KYC and AML procedures, and become its client on its platform.
This requirement applies not only to private DLTs and regulated institutional tokenization, but also to assets tokenized on public blockchains, where investors are often required to register separately with each issuing platform.
Ami Ben David, founder and CEO of Ownera, says: “Buy-side institutions are particularly reluctant to hand over their clients to numerous and disparate tokenization platforms, each powered by different technologies.
“For investors, the ideal scenario is to view all of their investments in one place, without having to navigate through various technology systems and registration processes. This fragmentation has trapped the market in what is called “Token Island”, hindering its growth and broader adoption.”
Ownera, a company backed by major institutions including JP Morgan and US Bank, has introduced, in collaboration with numerous market leaders, a revolutionary solution to this problem with its “Routers”.
This technology, using an open interoperability protocol called FinP2P managed by Global Digital Finance (GDF) Tokenization forumit allows each sell-side, buy-side and service provider to connect directly to each other, regardless of the underlying technology used, facilitating seamless trading across the board.
FIX has teamed up with FINP2P and Ownera to launch a new Protocol Interoperability Alliance. The Alliance is committed to enabling seamless messaging between traditional finance and digital securities, leveraging the strengths of the FIX Trading open source community and the FinP2P tokenization interoperability protocol, governed by GDF.
Sell-side routers, connected to tokenization engines, can access all buy-side routers connected to investing, ordering and trading platforms. Buy-side routers, in turn, can view all sell-side routers and the resources they offer in a unified list, routing orders to them as needed. They also connect with other buy-side routers to provide cross-market liquidity. Both sell-side and buy-side routers have visibility into all service routers that provide payment, custody, and escrow services to the network.
This integration means that demand can directly meet supply and services can efficiently satisfy both parties. All this, allowing each party to choose their own technological solutions and continue to innovate. Routers harmonize investor and asset data across the network, facilitate messaging between parties throughout the life of the assets, and even help orchestrate settlement between parties for each trade.
Once this issue is resolved, assets can finally “escape Token Island” and allow the market to expand into a range of commercial applications where tokenization offers significant cost savings, new models and revenue growth opportunities, including tokenized money market funds, private equity, debt markets, collateral movements, Repo markets, FX swaps and others. Anything that can be tokenized, will be tokenized.