Financial Giants Explore Tokenization, But Public Blockchains Unlikely in Near Term
We won’t be seeing tokenization coming to public blockchains anytime soon
What we are likely to see is banks launching their own permissions blockchain to issue tokenized assets
So BlackRock is unlikely to use public blockchains for tokenization
Here’s why 🧵👇
Financial giant BlackRock probably won't launch a tokenization platform on a public, permissionless blockchain anytime soon. More likely, they'll follow the path of other banks by releasing tokens on private, permissioned blockchains that they control.
One simple reason: they are still using legacy system.
Fragmentation and Interoperability Solutions
But what about the liquidity fragmentation that could result from many separate bank chains?
This question is being worked on already.
Last summer, SWIFT, Chainlink and over 12 major financial institutions collaborated to solve blockchain interoperability. They found Chainlink's Cross-Chain Interoperability Protocol (CCIP) could connect these private bank chains to public chains by using the institutions' existing banking infrastructure and messaging standards.
SWIFT messages would enable cross-chain token transfers between any public or private chain. The messages would also contain data to instruct the destination chain on how to process the tokens.
To demonstrate this, the group used CCIP to bridge a private chain (Quorum), and two public blockchains (Ethereum, Avalanche). This shows financial networks won't be forced onto one chain, but many chains can interact through secure interoperability.
Understanding Swift and Tokenization
Swift, a global provider of secure financial messaging services, conducted experiments demonstrating the potential of its infrastructure to facilitate the transfer of tokenized assets across multiple blockchains.
This initiative is part of Swift's broader strategy to ensure secure global interoperability in a fragmented financial ecosystem.
Tokenization and Institutional Interest: Revolutionary in asset management, with 97% of institutional investors believing it will transform the industry. Increased efficiency, cost reduction, and opportunities for broader investor participation through fractional ownership.
Challenge of Interoperability: A major challenge in the tokenized asset market is the management of assets across different blockchains, each with unique functionalities and liquidity profiles. This fragmentation requires financial institutions to build multiple connections, leading to operational complexities and increased costs.
Swift's Role in Interoperability: Swift, in collaboration with major financial institutions and Chainlink has demonstrated the ability to provide a single point of access to multiple blockchain networks. Chainlink CCIP as an enterprise abstraction layer, enable interoperability connecting Swift to various blockchains like Ethereum Sepolia.
Applications Demonstrated: The experiments showed transfers of simulated tokenized assets across different blockchain scenarios: within the same public blockchain, between different public blockchains, and between a public and a private blockchain.
Swift’s Broader Strategy: These experiments align with Swift’s wider strategy to integrate new technologies and platforms, building on previous work to support the interconnection of CBDCs and other digital assets with existing payment systems.
Future of Tokenized Asset Trading: Swift anticipates that tokenized assets, particularly in secondary trading of non-listed assets and private markets, will benefit significantly from these advancements. This integration can unlock the potential of Distributed Ledger Technology (DLT) through interoperability.
Impact on Financial Market Infrastructures (FMI): Clearstream, DTCC, Euroclear, and others involved in the experiments view this interoperability as key to transitioning the financial industry into the digital era. It supports the tokenization of assets and aligns with digitization efforts.
Swift’s Role as a Connector: Swift's infrastructure can act as a secure and scalable way for financial institutions to connect to multiple blockchain types. This positions Swift as a central player in reducing fragmentation in the tokenized asset space.
Chainlink's Contribution: Chainlink's involvement was crucial in demonstrating that interoperability across various blockchains is possible with minimal resources, even for large banks and market infrastructures. This collaboration marks a significant step towards widespread digital asset adoption in the banking industry.
Expect Private Chain Bridges First
Initially, cross-chain bridges will probably only exist between private bank chains. But as regulations develop and public chain ecosystems expand, assets will inevitably bridge to public DeFi as well.
Tokenization Will Require Interoperability
Tokenization in finance is inevitable but will require interoperability between many blockchain networks. Technical solutions for this are already in development between major financial players. Rather than one chain, the future will consist of thousands of interoperable bank and DeFi blockchains.
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