Yesterday during a session at the SIBOS banking event the benefits and opportunities of tokenization were explored. Jens Hachmeister of Deutsche Börse Clearstream sees the benefits in two ways. On the one hand, tokenization enables efficiencies and cost reduction. And it also offers new business opportunities.

The topic of tokenization was discussed, which allows the fractionation and “democratization” of access to assets. “Just because it represented an asset like an ERC 20 token, it suddenly didn’t bring democracy into finance. That’s just good marketing,” said Yuval Rooz of Digital Asset.

I wasn’t criticizing fractionation per se. Instead, he emphasized that automation technology and processes provide operational efficiencies in workflow. And it’s those cost savings that enable fractionation.

On the other hand, many of these fractionalized assets were previously only available to institutions and are now accessible to wealthy accredited investors, not the general public. So instead of democratizing access as financial inclusion, token sellers are tapping into a highly lucrative investment fund. For example, accredited individual investors in the United States hold $82 trillion in assets.

Rosie Hampson of Goldman Sachs had a nuanced opinion. “I think that the fractionation has as much to do with mobility as with access to the market.” In other words, instead of assets getting stuck in one place, they can be swapped or moved faster.

Day trading is a hot topic for banks and is enabled by tokenization. He gave the example of the HQLAᵡ blockchain solution that allows banks to trade and settle assets with each other intraday instead of waiting two days for the underlying securities to move between custodians.

It also appears that there may be a split of this tokenization opportunity. David Durouchoux of Société Générale FORGE noted that tokenization of real estate and alternative assets could be an opportunity seized by fintechs and alternative asset managers. Banks are more interested in MiFID tokenized securities.

Public or private blockchain

It’s no secret that Societe Generale FORGE is a big supporter of the public blockchain. It is the company that helped the European Investment Bank launch a €100 million bond on the Ethereum blockchain as a security token, a transaction in which Goldman also participated. SocGen’s Durouchoux noted that public blockchains allow global reach, and the costs are pay-per-use in contrast to the large investment involved in permissioned blockchains. For end users, there is the possibility of automated transactions and value-added services.

Clearstream’s Hachmeister sees most changes as a push-and-pull process, with the technology driving tokenization. “The pull must come from the market. And currently, I think we see a lot of pull from the retail markets, which we need to transfer to the institutional ones,” Hachmeister said. Of course, the retail markets are on the public blockchain.

Goldman’s Hampson echoed the sentiment, saying: “Definitely as an industry we need to look at public broadcasters as well. We need to be able to transact with our customers when and where they want.”

Hachmeister wants product managers to say, “I want to develop the next bond, which is set in USDC (stable currency). I want to develop the next certificate, which has a boost with staking revenue.”

However, while he is interested in DeFi, he also wants to see it in a regulated framework that has the same market integrity as traditional markets.

Digital Asset’s Rooz emphasized that the user experience of the public chain is far superior. “We would never accept today that for each website you would have to install a different browser and go to a different Internet,” Rooz said.

However, he added, “you can’t accept a user experience just because it’s a better user experience if you compromise some of your fiduciary duties by finality, so people don’t reverse your transactions, people can decline your transactions.” For example, he pointed out how Binance, a supposed decentralized chain, was recently stopped by Binance following a bridge attack. And the notorious Ethereum DAO hack caused a hard fork a few years ago.

So the sentiment seems to be yes to public blockchain, but with regulation.

atomic settlement

One of the key benefits of blockchain tokenization is the ability to have delivery versus payment or atomic settlement. For years this is a topic that has been debated, with the DTCC being one of the first to raise the issue that atomic settlement may require the availability of more liquid funds in the absence of clearing.

This was precisely the point made by Goldman’s Hampson. “Atomic settlement, in principle, can have a transformative impact, but it’s really about thinking about when and where it can be used,” he said. For example, he believes it could be optimal for new issues or securities lending in a difficult market situation. But not in all cases.

Both Digital Asset’s Rooz and Clearstream’s Hachmeister believe that atomic settlement provides options, but it doesn’t necessarily have to be used everywhere. Hachmeister sees it as a feature where you decide what settlement period is desirable and you have more options than today.

Tokenization and interoperability

A final point is about the challenges of tokenization. A poll during the session asked the audience which topic is the most pressing, with interoperability winning by a landslide:

• Platform interoperability (69%)
• CBDC for liquidation (17%)
• Clarify the benefits of digital assets (10%)
• Liquidity volume (3%)

At the point of platform interoperability, relevant initiatives include Ownera’s FinP2P, a trial of SWIFT, and the Regulated Accountability Network.