Many experts have predicted that the blockchain technology that support cryptocurrencies will someday be used to conventional financial assets like stocks, bonds, and real estate, which has made tokenization a hot issue in recent years. That future seems to be here with the announcement that the iShares Core S&P 500 ETF (CSPX) from BlackRock has been transformed into a token on the Ethereum network and is now tradeable on the Uniswap decentralized exchange (DEX).
It’s tough to exaggerate how significant this action is. BlackRock is the largest asset manager in the world, with $8.6 trillion in AUM as of year-end 2022, and CSPX is one of the most significant ETFs in the market, with about $57 billion in the fund.
Additionally, BlackRock is not the only company. In January, Cité Gestion became the first private bank to tokenize its own shares under Swiss law in collaboration with Taurus Technology. HSBC and the European Investment Bank (EIB) recently collaborated to launch the first-ever pound sterling-denominated digital bond using the HSBC Orion tokenization platform.
The biggest winners of tokenization, however, will be the trading platforms themselves, according to Jeff Vier, Head of Tokenization at Republic Crypto. He claims that the real innovation in this area is not technological but legal, and that while well-known companies and well-liked asset classes may garner the headlines.
To have and to hold
Republic Crypto is a platform that selects private investment opportunities in startups, gaming, real estate, and cryptocurrency that have a high potential for growth. For over 10 years, Vier has been immersed in the investment ideas of the cryptocurrency ecosystem, and he thinks the BlackRock decision is a sign of things to come.
BlackRock created a tokenized ETF and used it on a decentralised exchange, according to Vier, speaking to Kitco Crypto. That is truly really, really inventive. They permitted the free trading of an asset without the access component that needs KYC [know-your-customer]. Imagine more ETFs entering the world of decentralised finance without being redeemed, but instead being permitted to trade and take part in the lending and borrowing aspects of finance in a decentralised way. It’s like the cat’s out of the bag.
According to Vier, there is a sizable demand for securities worldwide, but KYC hinders the majority of people from purchasing them, dividing the world into several regions based on geography, citizenship, and legal frameworks, which restricts the scope and potential of the global market. The world needs securities, he added, since that is what people desire to own. “But KYC prevents you from doing so. When people finally arrive, they are confined to the platform where they have registered, making it impossible for them to access liquidity.
Vier claims that when the custody and redemption components of securities are separated, magic happens.
When you take [securities] and separate the custody piece—that is, the ability to hold it—and bear in mind that it’s not an asset that can be destroyed, you’ve separated the ability to hold it from the ability to redeem it, he explained. Since you can actually go to the platform, do KYC with the asset you bought on Uniswap, and then actually redeem it for its cash value, the trading value or the decentralised finance [DeFi] value as collateral has an unhinged or detached value from the redemption value.
This indicates that KYC requirements are not applicable because BlackRock still maintains custody of their CSPX and merely issues tokens, allowing for free global anonymous trading of these tokens. It’s really rather innovative, he remarked. “It’s very smart, and it’s only happening at the legal level, not at the blockchain level.”
Have your KYC and eat it, too
The asset receives the benefits of blockchain technology and DeFi under this new tokenized regime without getting in trouble with the law or giving up the security that comes with traditional securities. On DeFi exchanges and protocols, the token is available for purchase and trading as well as posting it as collateral and staking it for yield. The underlying asset is still available for custody by qualified token holders, if they so choose.
Say that I’ve resolved to go redeem for that asset, Vier stated. I can go do KYC, go through those steps, and obtain that paper.
You might now respond, “I don’t want that.” Although I would prefer to keep things private, I would like to make use of this item. I’d like to acknowledge some of its worth. Therefore, I’m going to use it as collateral for a USDC loan,” he declared. “I’m going to use that USDC, invest in something else, and ideally at the time of the margin call, I’m going to return my premium, see the benefit of that loan, and get my tokenized ETF shares back
That is what is really, truly profound about this, said Vier. “You’re tangibly improving decentralised finance. I frequently claim that the tokenized version is instantly more useful than the paper version since it can only be more valuable if it is equally or even more secure than the paper version in terms of verification and security.
While the tokenized asset opens up lucrative new prospects for users, the blockchain’s added flexibility and transparency also opens up new possibilities for issuers.
According to him, BlackRock “may even determine that there are disclosures or facts about that asset that do not require KYC. “They may set up a Web3 webpage that only those users who have that token in their browser can visit, making it inaccessible to everyone else. Therefore, it becomes instantly more valuable just by virtue of being a token and having access to that protocol layer of the internet. It’s just a technological device that is considerably more capable.
Gold, small nations will benefit from tokenization
Another significant benefit of tokenization is effective “hyperfractionalization,” which enables issuers to efficiently divide assets into tiny bits and establish cost-effective entry points into a variety of marketplaces while minimising processing and administrative expenses.
The cost of access and purchase is greatly reduced by this extreme fractionalization, according to Vier. The final leg of the journey is that because the price is so much lower, your distribution is much more widespread. Therefore, the more an asset can be fractionalized, which tokenization excels at doing, the more investors, especially in this case, retail investors, you can reach.
According to Vier, the main reason tales about the tokenized BlackRock ETF are receiving attention is because of their capacity to successfully open up completely new markets for already-existing financial assets. He noted that in some circumstances, depending on the asset’s instrument and legal structure, it may be possible to enter decentralised marketplaces, which would further boost the asset’s liquidity, fungibility, and trading opportunities. “Anyone can use this dollar-cost average method.”
Perhaps even more importantly, anyone, anywhere in the world, can offer it. When it comes to items like commodities, which continue to be constrained by physical and legal restrictions, trading hours, contract sizes, and licencing, this might be very useful. Therefore, small nation states who want to hoard a lot of gold but aren’t necessarily as big as a reserve currency like the US may actually fund all those transactions on their own
Tokenization will be won by platforms that make the market
Vier envisions a tokenized future dominated not by large banks or asset managers, but by one or more platforms that enter early and intelligently, leveraging their direct access to both issuers and customers. “I don’t think it’ll be a single asset class or institution,” he said. “I believe it will be one platform
Vier thinks that when issuers approach a platform that understands the full potential of tokenization, the platform will assume responsibility for acting as the stock’s tokenizer. The platform will essentially serve as a conduit or catalyst for bringing tokenization to the general public, he claimed. Platforms are what offer a two-sided marketplace. To attract retail investors, they cooperate closely with the issuers. That person is who we predict will triumph at the tokenization watershed event.
According to Vier, tokenization is a necessity for the majority of financial assets since it benefits both the largest BlackRocks and the tiniest retail investors, as well as because it opens new potential for large profits and no less significant mechanisms for saving.
They’ll just spread like wildfire, I believe,” he said. “Everyone will notice the cost savings, which are tedious but an important factor in why it’s so useful, and I believe everyone will understand. The move will be made despite the fact that it will require a significant operational redesign because it is the asset that retail investors will insist on holding, as well as the asset that platforms and issuers demand on issuing. Thus, it has all the benefits.
