The Avalanche public blockchain recently introduced permissioned mini networks or subnets for enterprise use cases. Now several institutions are joining the ‘Spruce’ test net to participate in DeFi use cases, including FX and interest rate swaps. The institutions include T.Rowe Price (AUM $1.3 trillion), Wellington Management (AUM $1.4 trillion), WisdomTree and Cumberland.
Because Spruce is a test net, the experimentation involves valueless tokens allowing testing without risk. Spruce is an ‘Evergreen’ subnet, essentially a private, permissioned chain with institutional validators. However, it can interoperate with the rest of the Avalanche public blockchain ecosystem.
Unsurprisingly participants have to go through know your customer checks at onboarding with the proof stored in a non transferrable token in their wallet.
Foreign exchange (FX) combined with DeFi has captured the imagination of institutions. That’s partly because of the huge amount of settlement risk involved in the FX markets. That risk is eliminated if both sides of the FX transaction can settle simultaneously as Payment versus Payment (PvP) or atomic settlement, as it’s called in the blockchain world. Three countries have FX settlement risks that exceed the capitalization of the entire banking sector. Central bank organization, the BIS, has been exploring how to encourage greater adoption of PvP for FX settlement, with many of the new solutions using blockchain.
The BIS and Monetary Authority of Singapore have been involved in multiple DeFi experiments including the likes of JP Morgan, many of which focus on FX. However, rather than counterparty risk, the driver is often to enable 24/7 cross border payments.
Circling back to Avalanche, future plans for Spruce include the tokenization of equities, bonds and funds.
“We believe tokenization and blockchain will play an important role in financial services going forward,” said Will Peck, Head of Digital Assets, WisdomTree. “Avalanche Spruce provides an opportunity to further explore the potential efficiencies and benefits of on-chain trading and settlement with other financial institutions.
We’ve previously written about another Avalanche subnet, IntainMARKETS, which operates a tokenized marketplace for structured finance products. Intain also has a servicing solution that automates reporting for asset backed securities. Clients include WSFS Bank, UMB and Wilmington Trust.