Client demand is pushing more banks toward tokenization, with some spending tens of millions of dollars to build the necessary infrastructure. Tokenization offers two advantages: speed and capital efficiency.
Demand is heating up for tokenization, the process of converting traditional assets into digital tokens that can be traded on blockchains.
State Street, a bank with $4.1 trillion in assets, was the latest to jump into the fray last month. inking Partnership with crypto custody and tokenization platform Taurus.
“The two main reasons are client demand and regulatory clarity,” says Lamine Brahimi, co-founder and managing partner of Taurus. News.
According to Brahimi, fund management giant BlackRock’s foray into tokenization earlier this year is influencing customers of other banks to demand similar services.
Tokenization is not cheap. Brahimi said some of the banks his firm works with have spent tens of millions of dollars over the years building the necessary infrastructure.
“The main advantage of using a player like us is the cheaper cost of total ownership and faster time to market,” Brahimi said.
State Street is not alone. Deutsche Bank, Santander and Casey’s, one of Europe’s largest asset custodians, are also working with Taurus to tokenize assets.
Tokenization has been around for a while. As of 2017, organizations Experimented Placing various financial instruments on blockchains.
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Recent regulatory clarity regarding crypto assets in Europe and elsewhere has given many asset managers the green light to jump into action.
Tokenized private credit grew 39% this year to $8.9 billion data from rwa.xyz.
All tokenized assets, including US Treasury debt and commodities such as gold, are valued at over $11.9 billion.
According to Brahimi, the trend will accelerate in the next few fiscal quarters.
Why Tokenize?
Tokenization offers two advantages to banks: speed and capital efficiency.
He gave the example of two banks arranging a common short-term loan to highlight the benefits.
“If I were to do it the traditional way, the transfer of money-market funds would take two days to go from one custodian to another,” he said.
“If you tokenize it, it’s literally 25 seconds.”
Tokenization is an opportunity for banks to access a new distribution method through crypto.
“They are encouraged by the rapid growth of stablecoins,” said Ian de Bode, chief strategy officer at real-world asset platform Ondo. News. “There is growing evidence that other traditional assets have the same demand.”
In a recent interview with NewsRoger Bayston, Franklin Templeton’s head of digital assets, predicts that demand for tokenized money funds will match the $169 billion stablecoin market in the coming years.
The US is lagging behind
Key to tokenization growth is obtaining US regulatory clearance.
Banks operating exclusively in the US must be limited to using permissioned blockchains such as Hyperledger’s Besu, rather than more popular public options such as Ethereum.
Brahimi accused the Securities and Exchange Commission of 2022 ruling SAB-121. It created accounting obligations for companies to protect crypto assets for platform users that cannot be obtained on public blockchains.
This is a roadblock for many US firms looking at tokenization, as it limits them from accessing the most liquid blockchain markets.
Taurus, as well as many other tokenization platforms, promote themselves as chain agnostic, meaning they do not push clients towards any single blockchain.
Still, Brahimi says most people have a preference.
“When they have a choice, financial institutions are releasing products on public blockchains,” he said. “When they don’t have a choice, they do what they’re allowed to do.”
Tim Craig is News’ Edinburgh-based DeFi correspondent. Reach out with tips at [email protected].
Related TopicsTokenizationReal World Assets (RWA)