Tokenisation of real-world assets is the killer app for crypto
As bitcoin helps the unbanked in Africa to pay for things, banks see crypto as a way to improve systems that move money and asset titles in economies all over the world.
Some markets still operate with Telex communications or COBOL code; payments have their own national systems that don’t seamlessly integrate with those running trade matching or clearing and settlement. Multiple layers of intermediaries all work on the data in their own silos. This results in lots of reconciliation work and inevitable mistakes. To manage the risks from delayed settlement times, clearing houses suck up billions of dollars in collateral and capital to protect investors. Banks foresee a better way.
Blockchain technology replaces intermediary-controlled ledgers of ownership with shared versions validated by computers almost instantly, and improves on legacy payment systems by attaching payments to trades. It could provide banks with common sources of trustworthy data.
Transactions settle instantly, for almost no cost, as payments and title transfer are linked together in the same process. The markets will be more accessible to a broader range of investors, automated, and will operate 24/7. The technology could allow debt instruments to pay interest by the minute, and for nature-related securities to be linked to live ESG data-tracking.
The potential for major markets like foreign exchange or bonds – and emerging ones such as for carbon credits – to shift towards blockchains has roared onto the radar of the Reserve Bank and the federal government.
In a game-changer for how the domestic crypto discussion is framed, the federal government this week recognised that crypto involves more than consumer protection regulation.
Stephen Jones, Assistant Treasurer and Minister for Financial Services, opened the AFR Crypto Summit. Peter Rae
As the Australian Securities and Investments Commission (ASIC) vowed to press ahead with its crackdown on unlicensed financial products and determines how to license crypto exchanges under the existing financial services licensing regime, Assistant Treasurer Stephen Jones warned of the need for a balance. The government does not want ASIC to prevent the benefits of crypto technology if it will make markets more efficient.
“There is another good reason for regulatory certainty. It will drive innovation,” Jones said, as he opened the conference.
“While most of the public focus has been on cryptocurrency, the government sees extraordinary opportunity for innovation in the underlying technology to create new products and solve real-world problems.
“It will be in the tokenisation of real-world assets and information that drives a wave of innovation and productivity in financial and product markets. We want to encourage this.”
RBA assistant governor Brad Jones was also open to the opportunities. “Tokenisation offers some intriguing possibilities, but is not without its challenges and more work is needed to understand how we could yield the benefits while managing the risks,” he said.
Cost efficiencies
Major banks and fintech start-ups detailed some use cases at the Summit, which have been part of a series of pilot projects the RBA has managed this year alongside the Digital Finance Cooperative Research Centre.
Sophie Gilder, managing director, Blockchain & Digital Assets, Commonwealth Bank. Peter Rae
Commonwealth Bank has been working with the RBA to create tradeable biodiversity credits, using a digital version of the Australian dollar, a pilot “central bank digital currency” (CBDC) known as the eAUD. The plan is to open up “nature repair” as a new asset class.
A blockchain-based nature exchange could allow the buyer to view the latest prices, and essential metadata indicating provenance of the asset, in a central location. This would provide upfront price certainty, allow quality credits to trade at a premium, and make transfers within minutes at a fraction of the cost.
Programmability, via smart contracts, means rules on investor access to the securities can be baked in. Banks are also excited about “zero touch settlement” to reduce back-office reconciliation tasks and fees for missed payments.
“We’ll get more and more refined in terms of understanding what those cost savings actually are,” CBA’s Sophie Gilder told the Summit.
Similarly, ANZ has worked with CBA and the RBA to test the eAUD for trading carbon credits.
The government’s Australian Carbon Credit Units currently lack transparency and open buyers up to greenwashing. Blockchain-based carbon trading can provide trust by allowing investors to see the provenance of the projects underlying the credits.
In graphics presented by the RBA’s Brad Jones to the event, the cost savings in foreign exchange markets could be the largest.
Canvas Digital and DigitalX have been working with the RBA to show the eAUD can be exchanged for US dollars, via a popular stablecoin known as USDC, over the ethereum blockchain. Settlement happened almost instantly. This is an improvement to current FX markets, which involve multiple banks, various payments networks, the global Swift messaging system, meaning transfers can take days and funds can be lost.
Lisa Wade, CEO, DigitalX, tells the Summit property is ripe for tokenisation. Peter Rae
“FX is the deepest market in the world, there are trillions of dollars traded every day, and it is quite inefficient. There is a lot of friction,” said David Lavecky, CEO of Canvas, who was also on stage at the event.
ASX-listed DigitalX has also been working on tokenising property. The plan is to connect eligible buyers – particularly those in the frustrated generations priced out of the market – with available properties through an automated blockchain-based system.
“We’re moving from this analogue arena to a digital arena,” DigitalX founder and CEO Lisa Wade told the Summit.
The company is targeting people with good jobs who can service loans but are struggling to raise a deposit. DigitalX works with AMP and Bendigo Bank to determine their serviceability and then tips in 20 per cent of the deposit.
Obviously, there is lots of work to do to bring these visions into reality.
Brad Jones mentioned three initial issues in his speech: regulatory uncertainty and compliance obligations; a lack of interoperability; and the impact on transactional liquidity from prefunding and market fragmentation.
RBA assistant governor Brad Jones addresses the AFR Cryptocurrency Summit in Sydney on Monday. He said tokenisation could mean large cost savings, but there are challenges. Peter Rae
Banks will also need to be convinced to invest as a cost out, rather than a new revenue flow. They will also have to maintain existing technology and make sure it all connects to the new systems.
Brad Jones this week said annual cost savings could be between $1 billion to $4 billion for banks and market players, and an additional $13 billion for corporations by reducing issuance costs. This will help banks frame return on investment analysis to approve budgets to continue research and development in the space.
Despite the challenges, banks seem determined to persevere and have shrugged off last year’s crypto winter.
As National Australia Bank’s Kate Cooper told the Summit: “We’re in it for the long game, thinking about the underlying infrastructure and building the muscle, and what’s going to happen with the next wave of tokenisation of real-world assets.”
“We’re looking to set ourselves up to take advantage of future demand as the market matures. That’s exactly the kind of message we’re hearing from our customer base.”
