Distributed ledger technology (DLT) has long been promised to upend traditional financial services.
The common refrain has been that blockchain would do so by disintermediating everything that banks do — from settlements to extending credit to investing, and even to sending and storing money.
The reality has proven to be a bit different, as it has been the traditional activities of finance, and some of the most marquee traditional players that have been helping scale DLT, and specifically, tokenization.
Tokenization, in concept and practice, converts traditional financial assets such as loans into digital tokens that in turn replaces sensitive information with unique, surrogate identifiers.
To be sure, FinTechs and crypto firms have been firmly entrenched here, too.
In one recent example, Swiss crypto custody firm Taurus, which is in turn backed by Deutsche Bank, has launched a partnership with lending platform Teylor. As part of those joint efforts — and the growing appeal for tokenized debt — Teylor’s credit portfolio tokens are now allowed to be admitted for secondary market trading on the Taurus TDX market.
In another example, in mid-November, UBS, SBI Digital Asset Holdings and Asia-based bank DBS launched the world’s first live repurchase transaction with a natively-issued digital bond on a public blockchain, per a joint release from the companies. The process of issuance and settlement involved digital payment tokens. It’s important to note that the tokens made their way across regulated entities located in three different jurisdictions — in this case, Singapore, Switzerland and Japan.
J.P. Morgan Chase said in October that its tokenized collateral network (TCN) had facilitated its first collateral settlement for a live client over-the-counter derivative transaction, underpinned by private blockchain. The banking giant said that BlackRock and Barclays were live on TCN.
In “Tokenization: Overview and Financial Stability Implications,” a paper published this fall by the Federal Reserve as part of its Finance and Economics discussion series, the data shows that the value of tokenized assets on permissionless blockchains stood at $2.2 billion as of May, and can scale into other financial activities.
The paper went on to state that “tokenizations might … facilitate lending through the use of tokens as collateral … where lending secured by the reference asset might be more costly or impossible. Moreover, transactions in the tokenized asset can settle more quickly than transactions in their respective real-world reference assets.”
But the Fed also added that “the financial stability risks of tokenization mainly relate to the interconnections that tokenization creates between the digital asset ecosystem and the traditional financial system, possibly transmitting shocks or volatility from one to the other.”
What’s needed for scale would be continued regulations and interoperability.
“The true intrinsic value of blockchain, which is around programmability of transactions, immutability of transactions, and the ability to do delivery versus payment and always-on types of payments, has yet to be unlocked,” Mastercard Chief Digital Officer Jorn Lambert told PYMNTS in July.
“Until there exists the ability to actually develop financially regulated applications on the blockchain, the benefits will never go mainstream,” he said.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More