How crypto is forcing banks, funds towards new digital asset markets

Despite the scandal at failed crypto exchange FTX, other US financial giants are moving into the space. In August, PayPal created its own stablecoin – essentially a tokenised form of the US dollar. The new form of money had the potential “to transform payments” in the emerging area of the internet known as web3, PayPal said.

Cryptocurrencies, including bitcoin and ether, are capitalised at $US1 trillion ($1.6 trillion). Markets for real-world assets – including real estate, derivatives, equities, commodities and bonds – are vastly larger, with a valuation of about $US800 trillion.

Boston Consulting Group estimated last year that the market for tokenised assets could reach $US16 trillion by the end of this decade. BlackRock chief executive Larry Fink said last December “the next generation for markets and next generation for securities will be tokenisation of securities”.

Banks buy in

It is ironic that big financial institutions are developing the same technology that sought to remove them as intermediaries when it was launched during the global financial crisis in the form of bitcoin. Indeed, the pseudonymous bitcoin inventor, Satoshi Nakamoto, complained in the first line of his white paper that “commerce on the internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments”.

But 15 years since bitcoin was created, it is dawning on banks that its innovations can be deployed to help push mainstream financial markets towards near-instant and free settlement, potentially removing intermediaries such as registries and clearing houses.

Delays settling transactions in traditional markets tie up many billions of dollars in regulatory capital. That could be freed up with blockchains, which can eliminate settlement risk.

Other investment banks are joining the rush. In January, Goldman Sachs announced its Digital Asset Platform had gone live on a private blockchain built by Digital Asset. The European Investment Bank was the first institution to collaborate with the platform to issue its first digital bond.

Goldman Sachs said it would be used to cut settlement times while improving issuance, registration and custody. “By reducing the typical bond issuance settlement time for the European Investment Bank from T+5 to T+0, at a speed of sub-60 seconds with cross-chain atomic ‘delivery versus payment’ settlement, we showed how transformative this technology can be to the financial markets,” said Mathew McDermott, the global head of digital assets at Goldman Sachs.

JPMorgan is a pioneer in the space. Its Onyx blockchain is already trading between $US1 billion and $US2 billion in digital assets each day, including tokenised residential mortgage-backed securities, money market funds and US Treasuries.

Down the rabbit hole

In Australia, the big banks and the regulators are also exploring tokenisation. The Reserve Bank has this year has been piloting various use cases for a central bank digital currency (CBDC) – a tokenised form of central bank money known as the eAUD – to help banks facilitate new blockchain-based businesses.

ANZ and National Australia Bank have created Australian-dollar stablecoins, essentially a tokenised deposit: the banks’ digital tokens represent funds held in trust by the banks that allows users to pay or receive Australian dollars on blockchain systems.

The movement is raising a plethora of new challenges. One is market fragmentation, as liquidity is split across different blockchain systems and various ledgers not interoperating.

But Mastercard said this week that it had been working with the RBA to allow the eAUD to move across different blockchains. ANZ said this month it was working with Chainlink Labs and Swift, a global network of banks, to do the same thing with its stablecoin, the A$DC.

There are also legal uncertainties the banks are keen to iron out. The Digital Finance Co-operative Research Centre, which developed the eAUD pilots with the RBA, wants Treasury to expand its “token mapping” exercise – which to date has mainly focused on unbacked cryptocurrencies and tokens – to examine the tokenisation of real-world assets. Regulatory clarity on how digital assets will be treated in law will give banks the confidence to continue to invest to develop the new markets, the group says.

“It should be much simpler to provide regulatory clarity for real-world asset tokenisation because the underlying assets already have an existing regulatory framework,” says Andreas Furche, CEO of the DFCRC.

“So, from a policy perspective, regulatory clarity for tokenised real-world assets should be relatively low-hanging fruit that enables large economic benefits.”

Andreas Furche will appear at the AFR Crypto Summit on Monday, where ANZ, NAB, Commonwealth Bank and the Reserve Bank will discuss the impact of digital asset tokenisation on the Australian economy.