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Incumbents embrace tokenisation and alliances take shape

The buy-in to the Tokenization of Financial Assets from major stakeholders like Blackrock, with $9.1 Trillion Assets under management (as of the March 2023), cannot be dismissed. Indeed, Larry Fink, CEO of Blackrock, recently said on YouTube that “the next generation of markets is tokenization of securities.”

According to Boston Consulting Group, the tokenisation of global illiquid assets presents a huge $16 trillion business opportunity by 2030. Let’s keep in mind that we are currently (ex-China) at a stage that advancements in digital cash are top of mind because of the tipping point following the LIBRA/DIEM plans. COVID and geopolitics gave this trend another boost that isn’t wearing off by any stretch of the imagination. In this same world, we are still plagued by the frictions of correspondent banking and the lack of interoperability between global settlement and clearing systems. Which means that the BCG-tokenized world urgently needs tokenized cash or better said, tokenized means of payments. Any tokenized asset has to settle through a tokenized means of payment.

Earlier this month, I received a press release highlighting a milestone in capital markets (in the most mature - US & Europe). Fintech BondStream built a new bridge between Euroclear and Clearstream & DTCC for private funding deals. You would think that there is full interoperability between these entities in 2023. “This is a market-first bridge for the final step of a securities trade and offers a more cohesive streamlined issuance to settlement to reporting platform that links cross border investments”. So, while the traditional capital markets world continues to develop by increasing connectivity in conventional ways, there are several industry initiatives that are building infrastructure for the BCG-tokenized world.

Stand alone innovators

Some of the standalone innovators are companies like TZero, Consensys Codefi, ADDX.

I would add RippleNet to this list because it is a potential enabler for the BCG-tokenized world (JPMorgan with its JPM Coin is a closed loop competitor to RippleNet). The buy-in from incumbents is also gathering steam. JP Morgan has been an early mover with Onyx and the JPM Coin and its involvement in nearly every pilot with central banks, BIS, MAS. One example is JPM Morgan’s involvement with Project Guardian led by Singapore's central bank along with DBS Bank and SBI Digital Asset Holdings. Project Guardian’s focus is on foreign exchange and government bond transactions against liquidity pools of tokenized Singapore Government Securities Bonds, Japanese Government Bonds, Japanese Yen (JPY) and Singapore Dollar (SGD)

JPMorgan has also launched the Onyx Asset Tokenisation project that aims to enable frictionless transfer of collateral ownership without moving assets using conventional rails. The head of JP Morgan’s Onyx digital-assets platform, Tyrone Lobban, says: “The launch of the Tokenized Collateral Network (TCN) application utilizes the blockchain to enable the transfer of tokenized ownership interests in Money Market Fund shares for the first time”. Goldman Sachs, BNP Paribas and DBS Bank are already using the Onyx-based repo service and have processed $700 billion in transactions in short-term loans to date.

Industry DLT-permissioned networks

A 2019 initiative with incumbent shareholders is Fnality. Launched in mid 2019 with 12 founding shareholders, it today boasts 17 major institutions: Banco Santander, BNY Mellon, Barclays, CIBC, Commerzbank, Credit Suisse, Euroclear, ING, KBC Group, Lloyds Banking Group, Mizuho Financial Group, MUFG Bank, Nasdaq, Nomura, Sumitomo Mitsui Banking Corporation, State Street Corporation and UBS.The Banker’s Plumber reflects on Fnality, another blockchain-powered platform.

Untangling the complexity of liquidity & settlement in the banking system

Fnality uses a permissioned Ethereum-based blockchain with the USC settlement coin. The purpose is to use this peer-to-peer digital cash asset to enable the settlement of tokenised transactions with finality. Of note is Euroclear and Nasdaq who are involved in the Fnality project; all other participants are banks. The newly-formed Canton Network network has come out in stealth mode just this month - May 9 2023, Businesswire writes that: “Firms including BNP Paribas, Deutsche Börse Group, EquiLend, and Goldman Sachs, among others, already use Canton; industry partners include Capgemini, Deloitte, IntellectEU, Microsoft, and Umbrage.” The Canton Network Twitter account has this tagline: “The first privacy-enabled open blockchain network designed for institutional assets, built to unlock the potential of synchronized financial markets.” Anthony Day's initial assessment of the Canton Network is “A newer, slightly loftier version of what Hyperledger & Corda have done for 8 years”. From reading the public announcements, the Canton Network focus seems to be on linking asset registries with cash payment systems (with new rails of course). Needless to say, that none of the Canton Network entities are part of the Fnality network and JPMorgan hasn’t joined the Canton Network. The composition of the participants is interesting. In addition to the expected categories: banks (4), stock exchanges (2), management consultants (2), specialty tech companies (BigTech but small too), Securities lending providers, there is a small private equity firm (Vert Cap), a micro VC (Liberty City Ventures), a trading house (Eleox – natural gas trading) etc.

The Canton Network boasts already 30 participants.

It is worth highlighting the participation of Equilend is a major 20+ year old securities lending platform which processes $2.8 trillion in trades monthly on its main platform. Last year, Equilend announced its plans to use blockchain to create a “single source of truth” for securities finance transactions. The project is called EquiLend 1Source. On the other hand, the co-participation of ASX and Digital Asset is puzzling after ASX’s failure and Digital Assets publicly blaming ASX 100% for the failure. While Nasdaq and Euroclear are part of Fnality, ASX and Deutsche Börse are the two ‘comparable’ Canton Network participants. The absence of the DTCC from the Canton Network is noteworthy and doesn’t help its cause. The DTCC has been working on Project Ion, a blockchain-powered standalone equity clearance platform to support a T0 cycle, which apparently is using R3’s Corda as the underlying DLT technology according public records from mid-2022. Fnality, which is Ethereum based, is actually part of the DTCC network and Project Ion too. While there are no entities involved in both the Canton Network and Fnality, there are three overlapping entities involved in DTCC’s permissioned DLT platform and Fnality. These are BNY Mellon, State Street and Credit Suisse Securities USA. JP Morgan, the standalone incumbent, is also involved in Project Ion. The single overlapping entity between DTCC`s permissioned DLT platform and the new Canton Network is Goldman Sachs.

How these permissioned networks will fare as they compete amongst them and also, as Layer1 and Layer2 permissionless networks continue to develop and attract developers onto their ecosystem, is yet to be seen. Adding these entities on your radar is prudent. Tokenization is unstoppable, the path towards its adoption is chaotic.

Source Digital Bytes Full Article Here

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