SIBOS on Tokenization: Fractionalization, Atomic Settlement, Public Blockchains – Ledger Insights

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

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

He did not criticize factionalism per se. Instead, he emphasized that technology and automation processes make work flow more efficient. And it is these cost savings that enable fractionation.

In addition, many of these fractional assets were previously only available to institutions and are now available to wealthy accredited investors, not the general public. So instead of democratizing access like financial inclusion, the token sellers tap into a very lucrative investment pool. For example, individual accredited investors in the United States own $82 trillion in assets.

Goldman Sachs’ Rosie Hampson had a nuanced view. “I think fractionalization is as much about mobility as it is market access.” In other words, instead of assets being stuck in one place, they can be traded or moved more quickly.

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

It also appears that there may be a breakdown of this tokenization opportunity. Societe Generale FORGE’s David Durouchoux observed that the tokenization of real estate and alternative assets could be an opportunity that fintechs and alternative asset managers are seizing. 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 is the company that helped the European Investment Bank launch a 100 million euro 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 costs are pay-per-use as opposed to the large investment involved in permissioned blockchains. For end users, there is potential for automated transactions and value-added services.

Clearstream’s Hachmeister sees most of the changes as a push-and-pull process, with the technology pushing for tokenization. “The draw must come from the market. And at the moment, I think we’re very much seeing moves from the retail markets, which we need to carry over into the institutional,” Hachmeister said. Of course, the 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 customers when and where they want.”

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 stake income.”

But while he is keen on DeFi, he also wants to see it in a regulated framework with the same market integrity as traditional markets.

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

However, he added, “you can’t accept a user experience just because it’s a better user experience if it compromises some of your fiduciary duty of finality, because people who don’t reverse your transactions, people can reject your transactions.” For example, he noted how Binance, a so-called decentralized chain, was recently stopped by Binance after a bridge hack. And Ethereum’s infamous DAO hack caused a fork a few years back.

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

Nuclear settlement

One of the main benefits of blockchain tokenization is the ability to have delivery versus payment or atomic settlement. For years this has been a topic of discussion, with the DTCC being one of the first to raise the issue that nuclear settlements may require more liquid funds to be available in the absence of netting.

This was precisely what was raised by Goldman’s Hampson. “Nuclear placement can in principle have transformational effects, but it’s really about thinking about when and where it can be used,” she said. For example, she believes it can be optimal for new issues or securities lending in a difficult market situation. But not in all cases.

Both Digital Assets’ Rooz and Clearstream’s Hachmeister believe that nuclear settlements offer options, but that they do not necessarily have to be used everywhere. Hachmeister sees it as a function where you decide which settlement period is desirable and has more options than today.

Tokenization and interoperability

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

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

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