"The next generation for markets...will be tokenization of securities."
quote from Larry Fink, CEO of BlackRock This blog is a running journal to track real-world financial services' growing adoption of distributed ledger technology.
Last week we wrote about a test run of a wholesale digital dollar - a way to pay for things in a truly digital fashion as opposed to our analog system today. This week's post is about those "things" - assets representing the ownership of stocks, bonds, mortgages, etc.
Today when you buy a stock or bond, ownership is transferred to you via a maze of recordkeeping in private, offline systems. Emails and excel spreadsheets are often exchanged; each trade (particularly as assets get more off the run) takes multiple touches by a human being. This creates inefficiencies and costs and increases the risk to the system.
It gets even more cumbersome when you think about lending against financial assets. Most of the time, lenders and borrowers don't have a real-time idea of the value of the collateral or the amount of margin they need to post (margin can be in flight, etc.). Ever been involved in securities repo or loan financing? You know precisely what I'm talking about. This reduces capital availability and slows down the economy.
This is in an age where we have supercomputers in our pockets, and AI chatbots can write a movie script in seconds. You'd think we could book, process, and settle trades without human intervention. We can - but finance hasn't caught up with the rest of the world. The "how" part uses distributed ledgers to track and record the ownership of assets. This is called tokenization. Combine it with the ability to change ownership of money on DLTs instantaneously, and you have an automated dvp ("delivery versus payment," a standard finance term) system, where the "d" is the tokenized asset, and the "p" is the tokenized money.
You don't need to take it from me - take it from the guy who runs the largest asset manager in the world. At an event earlier this week, Larry Fink, the CEO of Blackrock, said that tokenization is the "next generation for markets" and will provide "instantaneous settlement" and "reduced fees." Blackrock is doing more than talking - they have a "strategic partnership" with Circle, which issues USDC, which includes " exploring capital market applications for USDC."
While USDC won't work for regulated finance (it operates on a public chain and has no KYC/AML controls, which render it unusable for banks), we believe bank-issued liability tokens like USDF are going to be the currency used in capital markets settlements and payment settlements in the future. Call us biased since we enable banks to create bank-issued liability tokens, but we think Mr. Fink's comments and BlackRock's actions clearly indicate where the market is going.