🔒 Banks embrace crypto-inspired blockchain revolution: The dawn of asset tokenisation

In the aftermath of the 2008 financial crisis, cryptocurrencies emerged as a beacon of financial independence, challenging the dominance of traditional banks. Led by the mysterious Satoshi Nakamoto, Bitcoin introduced a decentralized system, leveraging blockchain technology to revolutionize finance. Initially dismissed by banks, the tide has turned, with major financial institutions like JPMorgan and Goldman Sachs embracing blockchain to tokenise assets. As tokenization gains momentum, it promises to reshape finance, offering seamless transactions and unlocking new avenues for investment.

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By Olga Kharif and Elijah Nicholson-Messmer ___STEADY_PAYWALL___

Cryptocurrencies were invented in the heat of the 2008-2009 financial crisis to provide an alternative to banks. The inventors of Bitcoin, who went by the pseudonym Satoshi Nakamoto, envisioned a financial system that didn’t depend on “trusted third parties” that they said couldn’t be trusted in the first place. Instead, it would use cryptography and a decentralized ledger called a blockchain to record transactions and provide irrefutable proof of ownership. Crypto evangelists said this would democratize finance and lower the cost of holding and using money.

Banks scoffed, calling crypto a cypherpunk pipe dream. But more than 15 years later, many banks and other financial institutions on Wall Street are not only in the cryptocurrency business (see ETFs, Bitcoin) but they’re also beginning to adopt the underlying blockchain technology. JPMorgan Chase & Co., Goldman Sachs Group Inc. and other banks are experimenting with or already offering private blockchain services, a concept that strikes many crypto lovers as oxymoronic. Banks are drawn to blockchain technology for its ability to “tokenize” traditional assets like stocks and Treasury bills, making trading them faster and cheaper. Critics say banks aren’t just adopting but co-opting the technology to generate fees, similar to how financial firms turned low-cost, low-touch exchange traded funds into a healthy business.

1. How are traditional assets turned into tokens?

“Real-world asset tokenization” is the process of representing real assets like bonds, stocks, art or even ownership shares in office buildings as digital tokens on a blockchain. Anyone who owns the token owns the asset, and ownership can be moved easily and almost instantly by simply moving the token from one wallet to another.

2. Why do that?

The tokenization process can eliminate settlement delays that come from having to clear transactions and record them across multiple record-keeping systems and from using a slew of intermediaries. Also, by placing contractual information such as the terms of ownership and conditions of transfer on a blockchain, assets can be bought and sold in pieces and traded outside of market hours. Tokens can also be programmed to automatically behave in certain ways: For example, to be released to a seller once goods are delivered to a buyer. Tokenized assets could attract young-adult customers who might not have a brokerage account but already trade crypto.

3. Are any financial companies on Wall Street doing this?

Yes. In March, BlackRock Inc., the world’s biggest asset manager, unveiled its first tokenized mutual fund, the BlackRock USD Institutional Digital Liquidity Fund. It holds assets in cash, US Treasury bills and repurchase agreements, which are a kind of short-term loan, and it keeps records on the public Ethereum blockchain. Investors can transfer their tokens 24/7 to other pre-approved investors. Also, in October, BlackRock used JPMorgan’s Tokenized Collateral Network to turn shares in one of its money markets funds into digital tokens, which were then transferred to Barclays Plc as collateral for an over-the-counter derivatives trade between the two institutions. Banks say this setup can allow customers to more easily use assets as collateral and even use assets that may have previously been unusable as collateral. Franklin Templeton already manages a tokenized mutual fund with more than $360 million in assets. JPMorgan is in the early stages of experimenting with deposit tokens, representing bank deposits. 

4. What other kinds of assets could be tokenized?

Stocks, art, houses, golf courses, exclusive memberships — you name it. All assets under the sun could theoretically be tokenized, and many proponents believe they will be. Even sneakers from the likes of Nike are already being represented on blockchains to prove their authenticity when the physical pair is traded.

5. What do financial regulators have to say?

US banking regulators are yet to greenlight innovations such as deposit tokens. They have also expressed worry that instant settlement could intensify bank runs. That’s because customers would be able to use the programmable tokens to automatically withdraw funds from banks when bad news hits. But regulators in other parts of the world, such as Singapore, are already working with many financial institutions on tokenization pilots for, among other things, cross-border payments.

6. What are some concerns?

Tokenization could potentially disintermediate some companies, such as broker-dealers, which currently facilitate many financial transactions. The exact setup of a tokenization project matters as well: With blockchain, there’s only one record for each asset, and the holder of that asset owns it. So if a token is transferred to the wrong address or is stolen, it may be lost forever if a public blockchain is used, for example. That’s why many banks are developing or have developed their own private blockchains. Those blockchains will need to learn to talk to one another if the banks want to be able to handle any substantial interbank transactions. Given how much money and talent banks are pouring into the functionality, that’s probably a matter of when, not if.

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