News
Wall Street Blockchain Pioneers Divided on Cryptocurrency Gray Area
(Bloomberg) — As Wall Street outpaces cryptocurrency natives in the tokenization of real-world assets, traditional institutions are grappling with the question of whether to venture into the gray area of decentralized finance.
Bloomberg’s Most Read
This gray area, also known as DeFi for short, includes projects that use automated software on top of blockchains to provide various financial services. Such ecosystems are typically outside the control of any one party, shrouded in regulatory ambiguity, and open to a potentially large pool of participants.
The question is whether Wall Street’s digital asset pioneers should intersect with these riskier crypto environments. The alternative approach for large institutions is to build blockchain-based representations of assets like bonds on secure digital ledgers, or to carefully target the use of tokenized products on public ones.
Subscribe to the Here’s Why podcast on Apple, Spotify, or wherever you want to listen.
For some banks, large-scale decentralization in tokenization “is not going to be realistic or desirable,” said Steven Hu, head of digital assets, trading and working capital at Standard Chartered Plc. “There is a critical need for centralized authority to ensure the authenticity, uniqueness and appropriate use of the underlying asset.”
Standard Chartered forecasts a tokenization market of about $30 trillion by 2034, with trade finance contributing a 16% share. Currently, the cryptocurrency market cap is $2.4 trillion. So far, about $13.2 billion in real-world assets are tokenized. Private credit is the largest segment, accounting for $8.4 billion, ahead of U.S. Treasuries in second place, according to rwa.xyz.
BlackRock, Franklin
Leading the way in the Treasuries space are BlackRock Inc. and Franklin Templeton, which manage government bond funds with ownership recorded on blockchain. The funds have raised nearly $1 billion in assets, represented by BUIDL and BENJI tokens, since launching in March 2024 and April 2021, respectively. That’s more than half of the total $1.8 billion in tokenized Treasuries, data from rwa.xyz shows.
Crypto-native players believe that private, restricted blockchains are unlikely to scale. Larger ecosystems will develop on public blockchains, said Nana Murugesan, president of Matter Labs Inc., a company that seeks to improve the usability of Ethereum, the leading trade highway in digital assets.
The story continues
Franklin Templeton ultimately expects its BENJI tokens, which represent shares of its OnChain US Government Money Fund, to be tradable in the broader digital asset ecosystem. Currently, investors must buy or sell the token through the asset manager’s platform.
“We expect there to be a space in the future where BENJI holders will potentially be able to make transfers between each other,” said Roger Bayston, head of digital assets at Franklin Templeton.
Working with Regulatory Bodies
Franklin Templeton’s fund had raised about $402 million in assets as of June 30. The company is currently working with regulators to understand how a stablecoin could be used in a decentralized environment, provided that participating wallets have undergone know-your-customer and anti-money laundering checks, Bayston said.
“I think we’re still working with regulators on how this process works,” he said.
BlackRock’s USD Institutional Digital Liquidity Fund, which invests in cash, U.S. Treasuries and repurchase agreements, has raised about $527 million since its launch in March, according to Etherscan data.
Its availability on Ethereum, a public blockchain, and an instant redemption mechanism have helped drive inflows, according to Carlos Domingo, co-founder and CEO of Securitize Markets, a BlackRock-backed tokenization platform.
DeFi protocols Ondo Finance and Mountain Protocol have used BlackRock’s fund token BUIDL to develop their offerings.
“DeFi is the horse pulling the tokenized RWA wagon,” said Jeremy Ng, co-founder of OpenEden, which tokenizes short-term U.S. Treasuries. “Without this thriving on-chain economy, there would be no demand for tokenizing these traditional asset classes in the first place.”
A place for DeFi?
Permission-based or not, banks, asset managers, cryptocurrency operators, and even regulators are exploring the potential benefits of tokenization. Project Guardian, led by the Monetary Authority of Singapore, has brought together 24 financial institutions to test asset tokenization use cases, with participation from JPMorgan Chase & Co., Deutsche Bank AG, Citigroup Inc., and Ant Group Ltd.
While MAS is “cautious about cryptocurrencies that have no underlying backing,” the regulator sees “a valid use case for tokenizing financial assets” and will work with the industry to grow such assets, MAS CEO Chia Der Jiun said in a briefing.
Goldman Sachs Group Inc. has single-handedly developed a digital asset platform called GS DAP, based on a private blockchain, which is used by the European Investment Bank and the Hong Kong Monetary Authority to issue bonds.
Whether such tokenization projects will eventually embrace DeFi remains an open question. Franklin Templeton’s Bayston said that will happen over time, as greater adoption by regulators and others leads to an understanding “of what public blockchains can do for the overall efficiency of capital markets.”
–With the collaboration of Chanyaporn Chanjaroen and Bernadette Toh.
Bloomberg Businessweek’s Most Read
©2024 Bloomberg L.P.