Wall Street has high hopes for blockchain technology to optimize asset transactions. Analysts predict that by 2030, there could be around $5 trillion in assets tokenized on blockchains.
However, strict regulations and the U.S. Securities and Exchange Commission's (SEC) concerns over cryptocurrencies could put the financial industry's ambitions short.
According to a report by asset management company Bernstein, asset tokenization has a potential opportunity of $5 trillion over the next five years, including $2 trillion in currency and bank deposits and 3 trillion billion USD stablecoins and CBDC Token .
Analysts say stablecoins and CBDC Token , along with yield farming on decentralized markets, will compete with bank deposits as investment and savings tools.
Citi Global Perspectives and Solutions' 2023 report also Chia this view, predicting that by 2030, $4-5 trillion in digital securities will be in circulation, of which $1 trillion will be in transactions. Finance based on distributed technology.
A total of $1.9 trillion in non-financial and quasi-sovereign corporate debt, $1.5 trillion in real estate funds, $0.7 trillion in Capital /risk Capital and 0.5- $1 trillion in securities and mortgage financing, along with $1 trillion in financial transactions, will be tokenized by 2030.
According to estimates, the blockchain market could reach a total of 147 billion USD by 2027.
What's the problem with blockchain on Wall Street?
Wall Street financial markets face limitations when investing and trading certain financial assets such as fixed debt, private Capital , and alternative assets compared to public equities, leading to under-allocation for these properties and some properties with active access.
Some assets may have been deemed unpopular due to being difficult to access or expensive to manage.
Today, different components of the financial market infrastructure are operated through different systems, some of which were developed during the times of COBOL and Telex.
Settlement has its own technology, like asset discovery and pre-trade execution, while liquidation and settlement are operated separately.
Many layers of the financial industry process the same data but do so on their own separate systems, so a lot of information must be exchanged.
Trading on the exchange involves a complex communication system. Cross-border payments must overcome many barriers on the exchange banking system through partners.
Stock Exchanges (CSDs) and Bond Clearinghouses (CCPs) execute post-trade settlement of funds and bonds, each technology designed to reduce counterparty risk and settlement errors .
A unified system across the industry would help overcome this problem. Tokenization and DLT help solve this problem – no more coordination, payment errors, waiting for documents to be faxed or mailed, or limited investment options due to operational difficulties in accessing them. access.
Ultimately, a digital infrastructure will be globally accessible, available 24/7/365, and integrated with automation systems powered by smart contracts and DLT, allowing for unlimited applications. possible with traditional infrastructure.
Depending on the client's investment philosophy or investment profile, new products could include equity debt instruments that accrue daily, hourly or even minutely as well as embedded ESG monitoring ( environmental, social and governance) in real time.
At the smart contract level, we can record detailed aspects of each asset.
For example, a smart contract can be programmed to automatically distribute cash Token for corporate events or dividends.
So, tokenization provides 24/7 continuous liquidation for applications such as collateral, instant payments, quick asset searches, conditional payments, regulated corporate activities Driven by smart contracts and new product features, as well as regulatory compliance enforced at the Token level.
Lessons to learn
Although crypto projects have increased significantly over the past few years, it is important to also XEM current challenges and learn from them.
An example we can look at is the ASX (Australian Stock Exchange).
To improve liquidation, settlement, asset registration and post-trade services for distributors, ASX moved to CHESS (Stock Exchange Electronic Registration System) in 2015.
The theory and project aim to change the technological structure without affecting business processes.
However, the team stopped the project and canceled the $165 million investment due to a series of problems, even though the technology offered good efficiency and quality.
Among the lessons Wall Street can learn from the ASX include the following.
- When moving from centralized legacy systems to distributed infrastructure, the governance program needs to be comprehensively innovated for all stakeholders.
- Implementation of complex processes should be phased with a manageable delivery plan.
- Business processes need to be re-engineered for distributed environments where latency is greater than centralized systems and smart contracts/DLT can provide new capabilities.
- The best results can be achieved through optimization of on- and off-the-books processes.
Regulatory and legal aspects
Recently, the SEC has taken action against a number of cryptocurrency companies, leading many to speculate about their intentions towards the industry.
However, when you see someone like Larry Fink of BlackRock, the world's largest asset manager, register to open a Bitcoin ETF, you know he knows what's coming.
Furthermore, if you XEM that Invesco, Fidelity, WisdomTree and other financial companies are also registering to open Bitcoin funds, you realize that these companies will not do anything without knowing that it will work. dynamic.
And to top it all off, when you hear the Fed's Jerome Powell say that cryptocurrencies have 'viability', you know that they do.
So we need to learn how to read those signs and not be enticed by the fears that are pushed upon us.
While the US remains difficult to move forward with cryptocurrency regulation, the crypto regulatory environment in other countries is quite encouraging.
With the groundbreaking MiCA (Markets in Cryptoasset) law – a law that took five years to complete – Europe is paving the red road for cryptocurrencies.
On the legal side of encryption in trade finance, the UK has recognized e-commerce documents as legal documents.
This represents a major milestone for blockchain implementation, as UK law regulates 80% of global financial transactions.
A law issued following the recommendations of the Law Council on electronic commerce documents was signed on 20 July 2023.
summary
Although blockchain technology could cause dramatic upheaval in traditional financial markets and major financial institutions appear willing to embrace it, there are still many regulatory, legal and technical hurdles to overcome. pass before this technology can be widely adopted.
However, many experts believe that this technology will gradually become an indispensable part of the global financial system.
