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Banks' New Endeavor: Tokenizing Real World Assets

JPMorgan, Citi and Franklin Templeton are digitizing traditional assets. Will they end up trading on crypto networks like Ethereum?

Tokenization - an emergent lexicon in the banking and financial arena that's stirring up discussions across continents. The recent Sibos conference in Toronto saw this very term echoing in every corner, signaling its undeniable significance in the global banking industry's future.



The Evolving Interplay: Banks and Blockchains

Gone are the days when cryptocurrency enthusiasts would smirk at the 'blockchain, not bitcoin' dictum. The sentiment from 2016, which resonated with the idea of utilizing blockchain networks for institutional purposes rather than a singular focus on cryptocurrencies, is now a distant memory. Fast forward to today, and the spotlight is on the dynamic interaction of banks with both public and private blockchains.

Financial magnates have shown a keen interest in permissioned blockchain networks, primarily motivated by the potential cost efficiencies these networks offer. Concurrently, their roadmap seems to be progressively leaning towards tokenizing a vast array of assets ranging from money market funds to expansive private markets such as real estate.



A Dual Spectrum: Tokenizing From Permissioned to Public

Sergey Nazarov, the co-founder of the decentralized oracle network Chainlink, believes that the ultimate consumers of tokenized real-world assets from banks will be the public blockchain protocols. These protocols, in their quest for diversified collateral, will find these assets invaluable. Nazarov opines that the yields from public blockchain realms will be irresistibly appealing to banks. The assets, once tokenized and incorporated into public protocols, will amplify the protocols' robustness and reliability.


This sentiment resonates with the stance of major financial institutions, which, despite being cautious due to regulatory landscapes, especially in the U.S., are unmistakably leaning towards Ethereum-compatible products. Noteworthy initiatives include Citi's ventures into tokenized deposits and trade finance applications. Additionally, Taurus, an institutional custody firm, recently unveiled a tokenization engine and has initiated collaborations with esteemed names like Deutsche Bank.



Tokenization: A Deep Dive

JPMorgan, a dominant force in the banking sphere, embraced the potential of tokenization long ago. Since the inception of its blockchain program in 2015 and the subsequent release of Quorum, its permissioned version of the Ethereum code, the bank has been a forerunner in the space. The efficacy of its endeavors is evident in the Onyx Digital Assets platform's success, which, using the tokenized fiat JPM Coin, has overseen transactions worth over $900 billion.


A key aspect of the bank's strategy revolves around the public Ethereum mainnet. JPMorgan has always approached public blockchains with caution, primarily due to compliance and reputational risks. However, the ever-evolving nature of the public Ethereum chain, transitioning from proof-of-work to the more environmentally friendly proof-of-stake mechanism, holds promise.

The Franklin Templeton Paradigm

The endorsement from Franklin Templeton, a colossal entity in the investment landscape with assets worth $1.4 trillion, brings added legitimacy to public blockchains. Their pivot towards this technology in 2019 was primarily to optimize the tedious task of recording mutual fund share ownership and transactions. The public Ethereum chain's evolution, especially its transition to proof-of-stake, has been a beneficial factor for entities operating nodes on the network, attests Sandy Kaul, SVP, Head of Digital Asset and Industry Advisory Services at Franklin Templeton.



The Road Ahead

The embracement of tokenization isn't limited to just the banking giants like JPMorgan and Citi. The latter, having embarked on its blockchain journey back in 2015 at its Innovation Lab, is no stranger to digital assets. Recent collaborations and proofs of concept, such as Citi's partnership with the Federal Reserve Bank of New York's Innovation Center, underscore the bank's commitment to the tokenization frontier.

Interoperability remains a focal point, with banks looking for seamless cross-border liquidity solutions. They envisage a future where liquidity can be effortlessly moved across a plethora of banks, thereby optimizing operational processes.



Conclusion

The inevitable convergence of banks and blockchains is not just an imminent future; it's a present reality. As financial institutions delve deeper into tokenization, it's clear that this trend, driven by both innovation and necessity, is here to stay.

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