• Wed. Jun 22nd, 2022

State Street says digital currency is in a ‘polar vortex’ as it eyes real assets

ByHazel R. Lang

Jun 20, 2022

“This is the first time bitcoin and other cryptocurrencies have gone through such an inflationary environment. This is the fourth crypto winter and the most severe considering wider adoption – we call it a polar vortex. said Mr. Ahmad. The Australian Financial Review during a visit to Sydney from its base in Singapore.

Mr. Ahmad said it was important to separate the current volatility in the cryptocurrency market from the desire to create market infrastructure that could eliminate counterparty risk by enabling instant transfers between peers.

Asset Tokenization

Institutional applications of Crypto contrast with retail investors seeking capital gains in speculative coins that lack real-world utility.

Mr. Ahmad believes that the collapse of bitcoin and ethereum this year, which has infected traditional markets, will lead to institutional interest in “asset tokenization” as global standards develop, for which global investment banks are pushing.

“But when it comes to an asset class, we think [crypto] is here to stay. There will be an evolution of players and protocols on the market. »

He believes that the World Economic Forum’s prediction that tokenized asset markets will reach $24 trillion by 2027 could yet come to fruition, as banks will want to use blockchain-based trading to unlock liquidity and create new bonds. new markets.

State Street holds approximately $43 trillion ($62 trillion) in assets under custody. Even if 2% of them are tokenized into a digital form to be traded on blockchains, “this will have a significant impact in terms of infrastructure requirements – and these changes are already starting to happen.”

“We believe regulatory harmony could create an environment where we see an explosion of tokenized instruments in the market,” he said.

Even though crypto exchanges are scrambling to create venues for tokenized asset trading, no liquidity pools or secondary markets have yet emerged. But with regulators and banks working on standards, State Street expects new markets to be established by the end of the decade.

Push for common standards

Organizations such as the International Organization of Securities Commissions (IOSCO), the International Digital Asset Exchange Association (IDAXA), Global Digital Finance (GDF) and the International Token Standardization Association (ITSA), supported by major banks and German stock exchanges, are among those pushing for common standards.

The ITSA has proposed “International Token Identification Numbers” as a standard for identifying cryptographic tokens, and an “International Token Classification” to indicate the inherent characteristics of tokens, including purpose, type of issuer and the regulatory frameworks that apply to them.

Singapore, Switzerland, Luxembourg and Germany are considering regulations to allow the issuance of “on-chain” assets.

The Australian Treasury will soon launch a “token mapping” process to determine local definitions and treatments. The Digital Finance CRC, established a year ago with funding from the Reserve Bank, National Australia Bank and Macquarie, has embarked on a research program to examine the digitalization of real-world assets and the response of Australia.

“Reinventing the financial markets”

“As an industry, we seek to ensure that standards emerge because this is a great opportunity for us to reinvent financial markets,” Ahmad said.

Benefits for banks could include reduced regulatory capital. He points to State Street Digital’s work with Vanguard in the U.S. forex futures market, where it typically takes days to trade collateral. A new platform allows collateral to be traded every 15 minutes, thereby reducing “risk-weighted assets”. This could apply to fixed income markets.

In 10 years, crypto will create liquidity for pre-IPO stocks and could give retail investors “fractional” access to bonds.

Mr. Ahmad said that tokenized carbon exchanges would provide investors with more transparency on carbon assets, as crypto technology underpins these markets.

“It’s starting to emerge and challenge the status quo of market infrastructure, including the need for central securities depositories, where these assets have typically been issued.”

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