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SIBOS on Tokenization: fractionalization, atomic settlement, public blockchains

digital asset trading security tokens

Yesterday during a session at the SIBOS banking event, the benefits and opportunities of tokenization were explored. Deutsche Börse Clearstream’s Jens Hachmeister views the advantages in two ways. On the one hand, tokenization enables efficiencies and cost reduction. And it also provides new business opportunities.

The topic of tokenization enabling fractionalization and “democratizing” access to assets was discussed. “Just because you represented an asset as an ERC 20 token, you didn’t suddenly bring democracy into finance. That’s just good marketing,” said Yuval Rooz of Digital Asset. 

He wasn’t criticizing fractionalization per se. Instead, he emphasized that technology and automating processes bring workflow operational efficiencies. And it is those cost savings that enable fractionalization.

As an aside, many of these fractionalized assets were previously only available to institutions and are now accessible to wealthy accredited investors, not the general public. So rather than democratizing access as financial inclusion, the token sellers are tapping into a highly lucrative investment pool. For example, individual accredited investors in the United States own $82 trillion in assets. 

Goldman Sachs’ Rosie Hampson had a nuanced take. “I think fractionization is as much about mobility as it is the market access.” In other words, rather than assets being stuck in one place, they can be traded or moved faster. 

Intraday trading is a hot topic for banks and one that is enabled by tokenization. She gave the example of the blockchain solution HQLAᵡ that enables banks to trade and settle assets between each other intraday rather than waiting for two days for the underlying securities to move between custodians.

It also appears there may be a divvying up of this tokenization opportunity. Societe Generale FORGE’s David Durouchoux observed that the tokenization of real estate and alternative assets might be an opportunity grasped by fintechs and alternative asset managers. Banks are more interested in tokenized MiFID securities.

Public or private blockchain

It’s no secret that Societe Generale FORGE is a big proponent of public blockchain. It’s the company that helped the European Investment Bank launch a €100m bond on the Ethereum blockchain as a security token, a transaction in which Goldman was also involved. SocGen’s Durouchoux pointed to public blockchains enabling global reach, and the costs are pay-per-use in contrast to the major investment involved in permissioned blockchains. For end users, there’s the potential for automated transactions and value-added services.

Clearstream’s Hachmeister views most changes as a push-and-pull process, with the technology as the push for tokenization. “The pull needs to come from the market. And currently, I think we very much see the pull from retail markets, which we need to transfer into institutional,” said Hachmeister. Of course, retail markets are on public blockchain.

Goldman’s Hampson echoed the sentiment saying, “We definitely need as an industry to look at public chains as well. We need to be able to transact with our clients when and where they want to.” 

Hachmeister wants to see product managers say, “I want to develop the next bond, which is settled in USDC (stablecoin). I want to develop the next certificate, which has a kicker with staking revenues.”

However, while he’s keen on DeFi, he also wants to see it in a regulated framework having the same market integrity as traditional markets.

Digital Asset’s Rooz emphasized that the public chain user experience is far superior. “We would never accept today that for every website you would have to install a different browser and go to a different internet,” said Rooz. 

However, he added, “you cannot accept a user experience just because it’s a better user experience if it compromises some of your fiduciary duties for finality, for people not reversing your transactions, people being able to reject your transactions.” For example, he noted how Binance, a so-called decentralized chain, was recently halted by Binance following a bridge hack. And Ethereum’s notorious DAO hack caused a fork a few years back.

So the sentiment appears to be yes to public blockchain, but with regulation.

Atomic settlement

One of the key benefits of blockchain tokenization is the ability to have delivery versus payment or atomic settlement. For years this is a topic that has been debated, with the DTCC one of the first to raise the issue that atomic settlement can require more liquid funds to be on hand in the absence of netting.

This was precisely the point raised by Goldman’s Hampson. “Atomic settlement, in principle, can bring about transformational impact, but it’s really about thinking about when and where it can be used,” she said. For example, she believes it could be optimal for new issuances or securities lending in a distressed market situation. But not in every case.

Both Digital Asset’s Rooz and Clearstream’s Hachmeister believe that atomic settlement provides optionality but doesn’t necessarily have to be used everywhere. Hachmeister views it as a feature where you decide what settlement period is desirable and have more options than today.

Tokenization and interoperability

One final point is about tokenization challenges. A poll during the session asked the audience which issue is the most pressing, with interoperability winning by a landslide:

  • Platform interoperability (69%)
  • CBDCs for settlement (17%)
  • Clarify of digital asset benefits (10%)
  • Volume of liquidity (3%)

On the platform interoperability point, relevant initiatives include Ownera’s FinP2P, a SWIFT trial and the Regulated Liability Network.

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