The old tech mantra of “move fast and break things” had long been one of the guiding principles of the cryptocurrency movement. The only problem: Too many things broke, leaving a string of high-profile bankruptcies and criminal prosecutions in its wake.
Yet many of the torches lit in the “move fast” phase are now being carried, albeit at a slower pace, by an unlikely group: the same traditional financial firms that crypto was hoping to disrupt. While none of it is as intoxicating as the old “Dogecoin to the moon” days, blockchain innovations are increasingly being appropriated and refined for the more boring — but very important — task of streamlining parts of Wall Street’s plumbing. Frequent attendees at crypto conferences have even noticed a sartorial shift: Fewer hoodies, more suits, and ties.
JPMorgan Chase & Co. last month expanded its blockchain-based payments platform to allow corporate clients to use euros, and the bank is exploring ways to expand an asset tokenization platform that has already traded more than $785 billion of notional value. Goldman Sachs Group Inc. is looking to increase the issuance of tokenized securities through the digital-asset platform it launched in November. Institutional behemoths BlackRock Inc. and Fidelity Investments are among a flurry of firms that have applied for Bitcoin exchange-traded funds in recent weeks, while a crypto exchange recently went live with backing from billionaire Ken Griffin’s Citadel Securities as well as Fidelity and Charles Schwab Corp.
"It may seem like everything is happening all of a sudden. But really you are seeing the fruits of many years grinding out of the spotlight, and solving problems we have from the vantage point of a regulated financial institution,” Tyrone Lobban, head of blockchain launch and Onyx Digital Assets at JPMorgan, said of the bank’s tokenization efforts.
The cascading chaos triggered by the failure of unregulated or lightly regulated crypto players like FTX may have helped create a new opportunity for traditional Wall Street firms. In a recent EY-Partheon survey of institutional investors, “regulatory clarity and oversight,” as well as “proven and trusted financial entities to interact with,” were ranked as the two most important factors when making a significant investment in digital assets. “Decentralization,” the goal of many crypto projects seeking to eliminate financial middlemen, ranked a distant seventh. And many of Wall Street’s efforts at the moment do just the opposite: Rather than do away with financial intermediaries, they’re just trying to use blockchain technology to make transactions involving them more efficient.
“Almost every week you see some bank or asset managers saying they're tokenizing this bond or this fund, we're doing this plan,” said Prashant Kher, a senior director at EY-Parthenon focused on digital-asset markets. “We're working with a lot of banks and asset managers behind the scenes to support a lot of that.”
Make no mistake: Wall Street is not getting into the business of hawking meme coins or trading the type of cryptocurrencies that triggered US enforcement actions against the likes of Coinbase Global Inc. because regulators consider them unregistered securities. Even ventures focused on crypto itself — as opposed to those focused more specifically on utilizing blockchain technology — are more subdued. EDX Markets, the recently launched crypto exchange backed by Citadel Securities, Fidelity, and Schwab, offers trading in just four coins. On Fidelity’s own platform, only Bitcoin and Ether are available. Wall Street appears happy to leave the wildest corners of the crypto market to the die-hards.
Instead, the focus is on how real-world assets can be converted into digital tokens to create trading efficiencies and develop new opportunities that blockchains and smart contracts allow. Analysts at Citigroup Inc. estimate that by 2030, there will be as much as $5 trillion of tokenized private-sector securities and funds, spanning everything from corporate debt and financing collateral to alternative assets such as real estate, private equity, and venture capital. Another $5 trillion could move into new types of money like central-bank digital currencies and stablecoins by then.
Of course, there are plenty of examples of grandiose blockchain ambitions that turned out to be overhyped. In 2015, Santander Innoventures — a fintech investment fund affiliated at the time with Banco Santander — and consulting firm Oliver Wyman predicted that blockchains could reduce banks' infrastructure costs by up to $20 billion a year by 2022. Needless to say, that hasn’t materialized. In one high-profile example, Australia's stock exchange ASX Ltd. in November announced it was reassessing plans to replace its settlement and clearing platform with a blockchain-based system following several snags. The bourse said it would write off up to $255 million ($168 million) in pre-tax costs related to the project.
Some roadblocks to faster blockchain adoption have included caution among regulators and a struggle to drum up interest in replacing systems and processes that aren’t broken.
"We have capital markets that have grown and developed over 100 years and no one has really designed them to be the way they are and have evolved over time," said John Whelan, managing director for crypto and digital assets at Santander's corporate and investment bank. "But it actually works."
Santander, which alongside Societe Generale and Goldman Sachs, led the issuance of a digital bond from the European Investment Bank in November, is also a shareholder in Fnality, a London-based company developing digital versions of major currencies to be used in wholesale payments and digital securities transactions. That would enable instant settlement of trades in assets like tokenized bonds. Like many other blockchain projects, Fnality has taken longer than anticipated. But a digital version of the British pound is expected to launch by the end of the year, Fnality Chief Executive Officer Rhomaios Ram said in an interview.
The past flurry of blockchain tests and experiments has also resulted in an unintended problem: a lack of interoperability between all of the proposed new systems that threaten to make even more complex the systems they’re trying to simplify.
"We have ended up with digital market infrastructure that resembles spaghetti,” said Hirander Misra, chairman, and chief executive of market infrastructure company GMEX Group. "Added to this fact is that financial institutions such as banks have differing views on tokenization and use of public, private or both types of blockchains."
Another hurdle has been a lack of involvement from Wall Street’s clients, though that’s starting to change. “We do believe that if we can create more tokenization of assets and securities, and that is what Bitcoin is, it can revolutionize again finance,” Larry Fink, BlackRock’s CEO, said in a Fox Business interview this week.
British asset manager abrdn has been working to tokenize its funds, including those for money markets and private markets, as well as integrate distributed ledger technology into its back-office processes. Other asset managers, including Hamilton Lane and KKR, also have been working on fund tokenizations.
"Why has it taken long? You need the market to come together," said Duncan Moir, senior investment manager on the alternatives team at abrdn. “Would you go to a marketplace for just one product? Probably not. That marketplace needs to have a menu to get people to go through the pains of onboarding.”
Goldman Sachs has been working with clients on creating more tokenized securities across different asset classes using the digital platform it launched in November. Mathew McDermott, Goldman’s global head of digital assets, can rattle off a long list of potential benefits for the firm and clients. Settlement takes a fraction of the time. There are potential operational efficiencies, reduced risk, and more functionality, such as the ability to trade with more precision.
"What is important to key market stakeholders, including regulators, is to understand the commercial drivers for adopting this technology," McDermott said. “And as adoption increases, those commercial drivers will become more prevalent."
JPMorgan's platform Onyx Digital Assets allows financial institutions to create tokenized representations of traditional assets such as US Treasuries that can then be used as collateral in repo transactions, a bedrock of the financial system that banks rely on for short-term loans. That tokenization allows the trades to be programmable, meaning the code can contain instructions on when repayments are made. For example, a trade could be coded to last just three hours, with cash lent against collateral automatically returning to the lender once the time is up. In the traditional repo, transactions typically are unwound at least a day after they are agreed upon.
Lobban said the platform is currently trading between about $1 billion and $2 billion a day among counterparties, including other large banks. That’s still a drop in the bucket when it comes to that market, but the long-term aspiration is to open the platform up to allow transactions in which JPMorgan isn’t a counterparty in every trade. The bank is continuing to add more clients and will look to expand use cases and collateral beyond Treasuries, Lobban said. JPMorgan is already realizing savings and new revenue streams, Lobban said.
“Once you see it, you can’t unsee it,” he said. “We have implemented some of these use cases and you can see that it’s faster, it’s cheaper, you reduce the back and forth.”
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