An overview of the main tokenization opportunities and the infrastructure required for Financial Institutions.
A high number of large, established banks made public announcements of services going live and technologies being implemented. This bodes well for the network effect to take off: the more actors in the value chain are ready, the easier it will be for blockchain based assets to flow across the chain.
A few assets have been tokenized at scale, primarily in controlled, B2B environments. Bonds, intra-day Repo and cross-border payments are the first successful use cases, demonstrating the large-scale benefits of the technology.
Tokenization with blockchain and smart contracts streamlines bond issuance and carbon credit trading, improving transparency and market efficiency while transforming financial markets.
The traditional process for issuing financial instruments, such as equities and bonds, has long been complex and inefficient, involving many intermediaries. A guaranteed bond issuance takes between 1,080 and 2,160 of working hours based on Reply’s research. Typically, there are 15 actors involved in the issuance of a bond, each incurring manual verification processes, maintaining registries etc.
Our research estimates that with blockchain, the process can be achieved in far fewer steps, with fewer actors (as little as 6).
Smart contracts can further automate payout and other corporate events.
Voluntary carbon markets (VCM) across the world are developing rapidly and play an equally important role in achieving global environmental goals. By giving offset credits liquidity, this type of market can encourage more private trading in the carbon market, which could be of great interest to both investors and environmentalists. VCMs are often plagued with a lack of transparency and market inefficiencies, which obfuscate the carbon lifecycle: these issues stem from asymmetrical information, fragmentation, and surprisingly poor liquidity. In some cases, these results in offsets that are retired by multiple companies, resulting in skewed data about the amount of emissions actually reduced.
Reply’s research demonstrates the power of immutable blockchain transactions, providing transparency for all actors involved.
For financial institutions that have not started yet, here are some of the no-regret moves possible today: education, risk management and Tokenization. Each have a different risk/effort profile.
The first priority is to appoint a handful of team members to become ‘fluent’ in digital asset technology and markets. This learning can be done through certification programs, POCs and partnerships. Equally important is the education of customers and key counterparties.
Start auditing the risk exposure, carry out a remediation program, set up an ongoing monitoring capability, etc. For example, a private bank could start adapting their Enhanced Due Diligence (EDD) procedures to include any crypto holdings.
One way to get familiar with the sphere of tokenization is to consider tokenizing proprietary assets. Banks can get fully control of the assets and their value, from custody to the distribution process, while the risk is fully under control.
The task of preparing for a growing world of tokenized assets seems daunting for traditional banks. There are a number of new complexities as a result of blockchain technology, including 24/7 markets, smart contract automation and instant settlement. Thanks to billions of venture capital investments, the landscape of solutions providers has grown rapidly.
Blockchain impacts operations and all parts of the core infrastructure, requiring diverse teams to assimilate the new concepts and threats. Learning by doing is the most effective way to get started and Reply can help you get started with a number of no-regret moves.