Larry Fink bets Bitcoin ETFs are just the beginning as Wall Street eyes $10tn tokenization play – DL News

Larry Fink should be happy.

The CEO of BlackRock has seen the Wall Street giant’s mock Bitcoin exchange-traded fund cross $10 billion in flows since its January launch.

However, Fink’s ultimate goal is “the tokenization of every financial asset,” he said in January.

Real assets

Wall Street’s interest in tokenizing financial assets such as stocks, bonds and funds so they can be traded and tracked on the blockchain is growing.

And no wonder – signed “real assets” will be worth $10 trillion by 2030, according to some estimates.

As retail traders whip themselves into a frenzy over the latest Bitcoin bull run, traditional financial giants are playing the long game.

Until now, realizing that opportunity has meant facing technological challenges, a lack of market infrastructure and regulatory uncertainty.

That may be about to change.

For more than a decade, investment banks and other financial institutions have been experimenting with blockchain technology to see if it could make capital markets more efficient by cutting out middlemen, improving record-keeping and speeding up trading.

Those involved say they face a host of complex obstacles that have often led to abandoned projects and failed startups.

Among the challenges? Blockchain doesn’t scale well, it’s too transparent to competing institutions and customer confidentiality, and it poses cybersecurity risks.

Its time ahead

And then there’s the fact that the technology has been tainted in the eyes of regulators by association with cryptocurrencies and scandals like the collapse of FTX.

Others say blockchain is so far ahead of its time that banks are just getting comfortable with it, and many projects prove the concept.

Swiss investment bank UBS has launched a digital bond that relies on both digital and traditional exchanges. French bank Societe Generale has issued a digital green bond on the Ethereum blockchain. London-headquartered HSBC is one of the banks that uses Broadridge’s service to settle repurchase agreements.

Cracking technology

It’s not entirely surprising that investment banks are eager to see what blockchain can do.

To a crypto native, traditional market structure seems impossibly inefficient.

It is characterized by fee-charging intermediaries – exchanges, transfer agents, brokers, clearing houses and custodians – who keep track of the asset and facilitate its journey from seller to buyer.

A shocking amount of this work is done on 20th century software – spreadsheets, fax machines and centralized databases.

The promise of blockchain as an almost instantly updated record of ownership is that it can do away with this legacy technology.

However, there is a problem.

Many of the securities that exist are not “native” to a chain in the way that Bitcoin or Ether are – they are just digital representations of assets that have been issued and stored in a custodian bank in the traditional way.

And that’s because bond market structure, middlemen and all, exists to satisfy regulatory requirements, mitigate risk, and keep conflicting interests apart.

To reap the full benefits of tokenization, there needs to be a new market infrastructure in place.

Featured securities in places like the UK and the US must follow these tracks, just as their traditional counterparts do.

Current projects are useful innovations, say promoters such as banking trade body UK Finance, but most automate only part of the trading lifecycle.

To reap the full benefits of tokenization, there needs to be a new market infrastructure in place.

Regulators come around

So far, financial institutions have encountered heaps of red tape in their tokenization efforts.

“Once you start looking at tokenization of financial assets, it’s more difficult from a regulatory perspective,” Nathan Catania, a partner at XReg Consulting, told DL News.

“You end up under an established financial regime.”

Now, however, regulators are starting to warm to tokenization.

Market watchdogs in the UK, the EU and in the US have introduced sandboxes that allow them to monitor firms as they experiment with tokenisation – with a view to perhaps changing existing laws to accommodate the innovation.

It’s too soon to know if these regulatory efforts will be successful, but it’s an encouraging sign, Catania said.

“The sandboxes are positive, particularly for jurisdictions that don’t want to run the risk of introducing a full-scale regime that may not be fit for purpose,” he said.

“They allow them to experiment, understand what works and where the risks really are.”

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