Coding has become the latest favorite cryptocurrency buzzword on Wall Street

December 28, 2024

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Coding has become the latest favorite cryptocurrency buzzword on Wall Street

(Bloomberg) — Bitcoin’s record rise has revived hope that the digital ledger technology underpinning cryptocurrencies will revolutionize everything from home ownership registration to bonds.

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Tokenization, or the process of creating digital representations of real-world assets on a blockchain, has become one of the buzzwords this year in both traditional and crypto finance circles. This excitement is reminiscent of the hype a few years ago about using blockchain for everything from tracking lettuce at Walmart Inc. To digitize stocks that proved premature.

For years now, asset tokenization has been tagged outside of stablecoins that serve as an alternative to actual currencies in cryptocurrency trading. Only about 67,530 parties — mostly institutions — own token assets that are not stablecoins, according to data tracking website rwa.xyz. Researcher Opimas says that only 0.003% of the total value of global assets has been converted into tokens, and many of the companies behind these projects are on the verge of going out of business.

The unfavorable regulatory system in the United States was largely to blame. For years, regulators have encouraged banks to avoid cryptocurrencies and related risks. While tokenized securities run on the blockchain and adhere to the same rules as traditional securities, regulators often lump them in with cryptocurrencies as worthy of heightened scrutiny. Many financial services providers have chosen to stay away, investing instead in areas such as artificial intelligence.

This is starting to change, as President-elect Donald Trump plans to establish a more favorable regulatory regime for cryptocurrencies, and with the world’s largest asset manager, BlackRock, launching a money market token fund this year. This prompts others to follow him.

“They now feel like they can do something and speed up their schedule a lot, whereas before they were just watching,” said Charlie Yu, co-founder of rwa.xyz. “They make things happen.”

Bracing for more traction, card network Visa Inc., in October, rolled out a platform that allows banks to issue tokens based on fiat currencies. In November, stablecoin issuer Tether launched a tokenization platform. In the same month, Mastercard announced that it had connected its token network with JPMorgan Chase to settle cross-border business-to-business transactions on the bank’s blockchain-based platform, Keenexis, and sees an opportunity to offer these payment plans to more financial institutions.

“This is a clear trend that will continue to evolve and open up a lot of new business models. This trend is here to stay,” said Raj Damodharan, executive vice president of blockchain and digital assets at Mastercard. Kinexys already supports about $2 billion in transactions daily, according to JPMorgan.

A large number of money market funds – many of which invest in US Treasuries – are planning to make their debut. Boston Consulting Group expects token fund assets under management to reach more than $600 billion by 2030, up from about $2 billion today. To make these tokens more useful, the Commodity Futures Trading Commission is considering new guidelines on how token assets can be used as collateral.

Tokenization is also described as increasing the liquidity of assets, making them accessible to more investors, while reducing costs and transaction time.

“By tokenizing those assets, it enables natural efficiencies,” said Rob Krugman, chief digital officer at Broadridge, which has tokenized trillions of dollars in repurchase agreements. “It could be bigger than the Internet. It’s fundamentally rethinking the way markets work.

However, some industry participants are concerned that the stampede could lead to the tokenization of assets that should not be tokenized, exposing investors to new risks, such as hack risks. Investors may also inadvertently end up paying more in fees for tokenized products versus traditional products. Or with assets that are difficult to sell.

“You kind of end up selling a lot of low-priced assets to unsophisticated investors,” said Nathan Allman, CEO of Ondo Finance. “Outside of Treasuries, I believe there is almost no value in tokenized public securities. In fact, no one has managed public token securities well. The majority of projects in this space are unfortunately trying to distribute low-quality, low-priced assets.

Carlos Domingo, CEO of tokenization platform Securitize, says he doesn’t buy into tokenizing real estate. Noelle Acheson, author of the Crypto is Macro Now newsletter, believes that tokenizing private equity “seems to me like a solution looking for a problem.” After all, many private companies provide shares to select partners – they don’t want them to sell them to others. Purchasing a piece of an iconic Picasso painting leaves the buyer without the pleasure of enjoying the actual art.

On the other hand, tokenization can also reduce some risks. The greater automation that comes with adding programmability to blockchain-based tokens could reduce some of the counterparty risk, as assets could be placed in escrow, for example, to be issued upon delivery of goods, for example, for example.

Capco analysts have seen a need to revamp electronic payment systems that were invented decades ago, and using blockchain to make money more programmable could improve the efficiency of payments workflows, but it will take time.

“There are a lot of opportunities, we don’t disagree with that, but there is still a lot of work to be done,” said Ervinas Janavicius, Managing Director at Capco.