This is the New York Stock Exchange where investors make
upwards of a billion trades in a single day. Many of those trades
happen in a matter of milliseconds, except not really.
trades on Wall Street actually take days to settle and lots of
people to make them happen. Take market makers, for instance,
they're the middlemen handling all those trades on Wall Street
and the top five market makers handle nearly 30% of all trades.
The truth is these intermediaries help with
volatility, but they also create a gap between buyers and sellers
in markets. And there are a lot of gaps throughout the financial
system. Ever noticed how long some bank transfers take you
think
what infrastructure and I mean, large scale financial
infrastructure globally, or nationally or whatever. It is
actually a highly siloed infrastructure, generally
speaking, so money moves on one set of rails, assets move on a
different set of rails, etc. to
banking titans like JP Morgan City and Goldman Sachs, they
have a solution. They want to push the American financial
system into the next generation, and they need to borrow a tool
from crypto blockchains, on which they would tokenize
various assets.
Digital First economy that we're moving towards is really
important as our clients embark on this digital journey, being
able to move money 24/7 365 And a programmable fashion with
always on is what we really want to enable our clients,
analysts at Citi actually think tokenization using blockchains
could become a $5 trillion industry by 2030. So why do
these big banks think blockchain technology can turbocharged the
financial system and can they actually pull it off?
Let's be clear, tokenizing isn't exactly new.
Well, we've been tokenizing assets in the financial markets
for literally hundreds of years. When you think about a
traditional stock certificate is nothing more than a token that
represents ownership of the keys of a company. This old asset was
a bearer asset, if you wanted to transfer it to somebody would
sign it on the back handed to them. And then they were
considered to be the owner.
Electronic trading and modern payment processors have
accelerated the global financial system to move assets much
faster. But Wall Street still operates on what's called T plus
two, or trade plus two days. That's how long it takes for
assets and cash to change hands. You don't have to be an
investment banker to feel that lag in our current system. ACH
transfers, credit card refunds, all kinds of money that moves
through our economy takes time to go from one person to another
part of the slowness is due to just how many steps and people
are involved. On Wall Street, for instance, brokers help set
up a transaction and they can charge a commission, then market
makers connects brokers to the assets they're trying to buy or
sell. They charge a fee to on the difference or spread of the
asking price of an asset and what someone is willing to pay.
Oh, and huge transactions will need to go through even more
steps for security and fraud prevention. Some big banks are
hoping tokenization on blockchains can streamline the
process of trading assets and maybe make it cheaper.
We've always believed that this technology has the ability to
really revolutionize and rewrite financial market infrastructure,
whether that infrastructure has to move money, securities, any
other kinds of assets. So despite the all the ups and
downs of prices, and crypto and all that, I think we've been
pretty consistent that the technology itself has a lot of
power to rethink financial infrastructure.
To get how tokenization works, we need to talk a little bit
about ownership in the digital era. Right now, it's hard to
transfer ownership of real world items over the web. Sure, you
might say buy a car through an online marketplace. But the
title that proves you own it will come as a piece of paper in
the mail a few weeks later, in the hopes of bringing ownership
online developers are creating tokens that represent real world
items. The great
thing is we can do this with almost any kind of an asset. It
could be a traditional stock or bond. It could represent
ownership of a building, it could represent ownership of a
car, it can represent ownership of virtual property in some game
land. And once you have these
assets that are tokenized, there's so many different use
cases for them. You can put derivatives on them, obviously,
you can open it up to the masses, whether you tokenizing,
something as simple as maybe real estate to other use cases
out there, even securities as well. The banks
backing this technology think it could expedite trading across
Wall Street and maybe create new investments altogether. That's
why they're putting their money behind it. For example, JP
Morgan has Onyx a blockchain platform it launched in 2020.
And the short time since then, it's handled $700 billion in
short term loans through its private blockchain. JP Morgan
says it's a killer app for the future of finance.
So we have a platform called Onyx digital assets, which is
you can almost think of it as a general purpose tokenization
platform with money that's provided through our you know,
our our money solution which As they call jpm coin, and now
because you can tokenize the security and you have the money
on the same infrastructure, you can potentially do a transaction
for 15 minutes or 20 minutes or, you know, two
hours. And Larry Fink, the CEO of investment giant Blackrock
called digital assets, innovation and tokenization. At
the next generation for markets.
A blockchain is basically a database of all the
transactions, we've got plenty of other bits of database
technology out there. So what does it makes a blockchain
database sometimes preferable? Well, for one thing, you have
many copies of the database that helps keep it secure. Each block
is cryptographically signed with a hash function, so that any
tampering is immediately evident. And you have a
consensus mechanism to control how you update that database.
Now, this is very useful in situations where a lot of people
want access to the same data. But they want to make sure it's
the right data because other people might, might not
necessarily get it right.
You basically have this capability of collapsing these
siloed infrastructures into one global infrastructure, where you
can move value, you can move assets, you can move
information. And all of a sudden, a lot of the
inefficiencies and friction that exists in the regular financial
world start to disappear just by virtue of the fact that
everything is a token that looks like the other tokens on the
same, same distributed ledger, and the same information is
being shared across various large players,
and blockchains are meant to be transparent, supposedly cutting
down the need for intermediaries that could charge fees or have
to do extra due diligence. Proponents say that it could
enable peer to peer transactions across many parts of the
economy. They also say it could allow for brand new forms of
ownership, like splitting professionalizing ownership of
property through real estate tokens, or tokenized. deposits
and bank accounts to allow for quick transfers of money between
people using peer to peer transactions.
Depending on how the token is constructed. It might be
divisible into smaller pieces. So you can trade a little piece
of a house or a car. Or it could be non fungible and represent
complete ownership of something like a piece of digital art.
And not to mention the holy grail tokenizing stocks. The IMF
said in February that tokenizing stocks and bonds could cut
trading costs but requires the money paying for those assets to
be tokenized as well, leading to banks making tokenized checking
accounts for Faster Payments. But even with all that promise,
how realistic is it that this will actually get implemented.
So he's definitely seeing a lot more experimentation. What we're
seeing as a result is, is a gradual movement forward. This
is not going to happen in a year, it's not going to happen
in three, it's going to take some time, and I think it's
going to be a lot of it's going to be baby steps.
If banks and asset managers want to participate in the
modernization of financial markets, they'll have to adopt
blockchain and tokenization. According to Bernstein. In a
report from June 2023, the firm said it sees $5 trillion of real
world financial assets being tokenized on blockchains. Over
the next five years, attempts to deploy blockchain tech and
traditional financial markets have been bumpy. The industry
tried to use it for tokenization back in 2015, and 2016. But the
hype faded. The financial system is one of the most regulated
industries in the world and making changes is slow going.
Multiple agencies like the SEC and the Treasury would have to
get involved and big bureaucratic government agencies
are slow to change. And the SEC has case officials that are
super skeptical of crypto and blockchain technology after the
collapse of crypto businesses in 2022. They just sued Coinbase
and binance. Two of the largest crypto exchanges in the world.
The agency is also considering alternatives to speeding up Wall
Street, it just approved a transition to T plus one which
would settle transactions faster. That new role would go
into effect in 2024. There are obstacles overseas as well. The
Australian Stock Exchange actually gave up on its plan to
use blockchain for its infrastructure after a study
found its test program needed an overhaul regulators there
decided it just wasn't worth it.
ASX said, Hey, we're going to do all our post trade processing on
blockchain. And they went through a very large, very
expensive process to re engineer what happens after a trade. If
you understand the plumbing of how markets work, it's pretty
complicated for how the ownership interests of the buyer
gets transferred to the seller and the money gets from the
seller to the buyer. There are plenty of people who are keeping
separate databases about that transaction. And that's sort of
a natural area where blockchain, you know, has potential. But
even as I said only 10 or 15% of that particular project was
blockchain. But the project was an utter failure.
With that in mind, the New York Stock Exchange might be one of
the last places to implement this technology.
If you're trying to apply blah auction to a very high
performing asset class. So I mean, think about equity
trading. I mean, equity streaming is extremely high
volume, very low latency. You know, it's a very efficient
market, I'm not really sure that you can replace some of that
infrastructure with blockchain and get a gain out of it. Or on
the other side, you can think of some really, really complex
classes like syndicated loans, which are extremely complex and
tons of people have to sign off, lots of people have to agree,
that may be too tough to solve with a blockchain. I fully
agree, I think blockchain solves a subset of the problems. And
the rest of the problems either can be solved better through a
centralized infrastructure, or through some other means, or a
consortium or something like that. But it is definitely not a
cure all.
But will really determine if tokenization on blockchains take
off is if people and businesses see a benefit, and maybe don't
even know they're using Blockchain at all,
I think adoption of like most technologies, and the less
friction it is, the less obvious it is to a client, the faster
the adoption. So you think of like Apple and the iPhone to be
able to kind of like that one stop shop and like, you know,
being able to, you know, do everything from banking, to
shopping to Commerce to having it it's like it's frictionless.
So for our clients like, they're not going to want to know that
they're using a blockchain or they they want to know that they
can have always on 24/7 365 programmable money