So far, the hype has not been matched with broad investor participation, in part because of the time it will take for platforms and other infrastructure to be built and adopted. Tokenized deals to date have faced a range of challenges in how they were offered, structured and distributed, says Ian Taylor, head of advisory services at Galaxy Digital, a digital-assets-focused merchant bank. “While I am confident these markets will develop, issuers are, quite wisely, being cautious until we see demonstrated engagement from investors,” he notes.
Andrew Keys, co-founder of hedge fund Digital Asset Risk Management Advisors (DARMA Capital), says it is too early for him to put money to work in security tokens, but he is bullish about their potential. He was among a group that helped the Monetary Authority of Singapore issue a token tied to Singapore dollars in an initiative called Project Ubin.
Parties to a digital ledger may be more likely to trust the origins of the assets underlying tokenized offerings if an agent has verified the information recorded about the deal and guaranteed its security.
“One cannot dismiss the presumption that there will be a benefit of increased liquidity to investors, but I don’t think at this point that can be said with any certainty,” says Nic Niedermowwe, CEO of crypto-dedicated fund management company Prime Factor Capital.
Tokenizing traditional financial assets isn’t a far-fetched concept. Indeed, digitalized securities have been around for decades. American Depositary Receipts are already an analog representation of shares in non-U.S. companies, issued elsewhere in the world but listed in U.S. markets.
Most stock certificates are also stored electronically, thanks to a process called “dematerialization,” which was extended after Hurricane Sandy in 2012 flooded a lower Manhattan vault and forced settlement giant Depository Trust & Clearing Corp. to send tons of the certificates away to be freeze dried.
Today, tokenization is about marrying up traditional financial products with new blockchain technology. Most large banks are investing in some proof-of-concepts so as to be ready for what they anticipate could be a rapid evolution in age-old settlement procedures.
For its part, BNY Mellon is eager to digitize its existing capabilities and leverage blockchain technology to improve its interactions with clients.
As one of the world’s largest custodian overseeing $37.1 trillion as of Dec. 31, 2019, the bank has a series of tokenization development projects under way to learn about different use cases, any risks to its adoption and what marketplace frictions it can remove for clients. For example, the bank is working to issue bonds and syndicated loans on a digital ledger.
Another such project is the bank’s participation as one of 15 shareholders in the Fnality Global Payments initiative, formerly called Utility Settlement Coin, a digital payments system designed to leverage the tokenization of cash. The idea is for banks in the network to deposit cash with the central banks governing any one of five currencies (CAD, EUR, GBP, JPY, USD) and then exchange digital settlement assets referencing those deposits instantaneously, without middlemen. The project is set to be extended beyond the initial 15 stakeholders in due course, according to Rhomaios Ram, CEO of Fnality.
“This is the evolution of money,” says Lucien Foster, head of digital partnerships at BNY Mellon. “We’re going from the old days of stock certificates being run across Wall Street to digital tokens that can be moved and settled with a keystroke.”
The growth in blockchain technology has also inspired a slew of related digitization projects at BNY Mellon. In 2016, the bank created a blockchain-based, parallel record of all its broker-dealer clearance and collateral management transactions. The so-called “BDS 360” project is key because the bank processes more than $10 trillion in Fed-eligible securities each day.
Blockchain technology has already been deployed in multiple areas of financial markets that are being targeted for digital disruption: from bonds issued by Daimler, Société Générale and the World Bank, to cross-border payments, trade finance and mutual funds.
BNY Mellon is partnering with a blockchain trade-finance initiative called the Marco Polo Network, founded by TradeIX and R3. And Franklin Templeton Investments in September filed a preliminary prospectus to register a new kind of blockchain-enabled money market fund, where the fund’s shares can be sold and redeemed on an app.