By Sergey Samushin, Head of Exchange Solutions, Devexperts
Over the past few years, several trends appear to be converging in financial markets that could lead to a fundamental change in how trading takes place. While investors will probably still be using the same tried and tested price charts and order books, what happens behind the scenes, after an order has ostensibly been filled on the trader’s screen, could be in for a major overhaul.
These trends include a shortening of settlement times across the board, a more crypto-friendly stance on the part of regulators, and a merging of blockchain with traditional financial markets.
Is a technology that was once dismissed by skeptics as a solution looking for a problem finding its way into the very plumbing of our financial markets?
Cryptographically backed tokenized securities
You may have heard about tokenization during previous crypto bull markets, when images of disinterested apes sold for millions, everyone suddenly became an NFT artist, and people tried to convince you that soon enough, everything, from your mortgage to your supermarket loyalty points, would be hosted on a blockchain.
While these seemingly outlandish claims have largely failed to materialize, something that would have seemed even more unlikely back then is taking place today. The ability to tie real-world securities to cryptographically verifiable, instantly transferable digital tokens solves a great many issues that traditional markets have with post-trade bureaucracy. This is particularly relevant at a time where almost all participants understand the value of moving to
T+0 settlement.
A technology fit for purpose
In January of last year, BlackRock CEO, Larry Fink stated that: “We believe the next step going forward will be the tokenization of financial assets, and that means every stock, every bond… on one general ledger.”
In July of this year, SEC chairman, Paul Atkins, initiated “Project Crypto,” an effort to revamp securities laws so that blockchain technology can be leveraged for securities markets. Atkins stated that: “Federal securities laws have always assumed the involvement of intermediaries that require regulation, but this does not mean that we should interpose intermediaries for the sake of forcing intermediation where the markets can function without them.”
This forced intermediation is a throwback to the days when stock certificates would be physically ferried between institutions in Wall Street’s early days. If blockchain has proven anything since bitcoin’s inception, it’s that (besides the bouts of tulip mania it periodically inspires) the technology is almost unimpeachable when it comes to keeping track of who owns what and facilitating instantaneous transfers in a highly secure, disintermediated manner.
Institutional and retail experimentation
Last March, BlackRock launched BUIDL, a tokenized money market fund available to accredited investors. Unlike other funds of its type, each token is instantly transferable, around the clock, and can be used as collateral on other participating venues.
A few months later, US investment management firm, Franklin Templeton, brought its own Nasdaq-listed US Government Money Fund to Ethereum after having initially launched it on the Stellar blockchain back in 2021. These institutions have opted to tokenize via public blockchains, leveraging their security characteristics and network effects. BlackRock’s fund is also hosted on Ethereum, though both are now issuing their funds on multiple blockchains.
Meanwhile, retail venues including Robinhood, Gemini, Coinbase, and Kraken, are all in the process of offering tokenized securities to their own respective clientele.
Coinbase recently announced that it will be offering tokenized stocks to its US clients, and that it aims to bring many more real-world assets into the on-chain realm. Gemini has recently started offering tokenized stocks to EU traders, with more symbols to be rolled out in due course. Kraken launched tokenized stocks and ETFs back in April for its US traders and has been rolling out the same service for international users since then.
Earlier this summer, Robinhood made a stir at its “To Catch a Token” event in Cannes, where it announced its own tokenized stock and ETF offering for EU customers. The broker showcased another tokenization use case by giving away $1.5 million in SpaceX and Open AI tokens, which are not currently publicly listed. The company sees tokenization as not only providing seamless access to stock markets across regulatory jurisdictions, but also allowing private equity to attract investment from a much larger cross-section of the investing public.
In June of last year, McKinsey projected that tokenized assets could reach a market cap of anywhere between $2-4 trillion by 2030. Standard Chartered, in the same month, valued the total of existing tokenized real-world assets at around $5 billion, stating that this figure could grow to over $30 trillion by 2034.
Technological leapfrogging?
It took the US from 2017 to 2024 in order to reduce settlement times from T+2 to T+1. The EU still conducts settlement in T+2 and is looking to follow the US move by 2027. One of the things we learned from the recent halving in US settlement times was just how much of a concerted effort it was between institutions, regulators, and working groups to bring the change into effect.
Meanwhile, continuous trading, instant settlement, and fractional ownership are built-in to the very technology that underpins crypto. Take bitcoin, which is the blockchain equivalent of an iPhone 3. It has been trading around the clock, with each unit divisible to eight decimal places, since 2009. Every single transaction that has ever been made is a matter of public record, and every fraction of a bitcoin has been securely and almost instantaneously transferred to where it was supposed to go (human error notwithstanding).
Tokenization appears to be offering interested parties the ability to leapfrog a host of technical difficulties in a manner similar to how many developing nations jumped straight to wireless broadband without having to develop extensive fixed landline networks.
Final thoughts
While regulators may have initially taken issue with the pseudonymous nature of many crypto projects, they are well-aware that blockchain ledgers are comprehensive records for reporting purposes that cannot be tampered with.
The recent pivot in the US to a much more crypto-friendly administration is evidence of a sea change taking place behind the scenes. Not as much to legitimize crypto itself, but to ensure that the leap forward the technology represents can be harnessed for the improvement of existing securities markets.
