The State of Affairs in The Tokenisation of The Banking  Industry

Guest post by Selva Ozelli 

The International Monetary Fund (IMF), the World Bank , Switzerland’s central bank (SNB) BRICS — the financial block originally comprised of Brazil, Russia, India, China, and South Africa, which added four more members in Iran, Egypt, Ethiopia, and the United Arab Emirates in the beginning of the year — and the Bank for International Settlements (BIS) have joined forces to leverage tokenization technology to streamline financial processes in banking and enhance global economic development .  The United States is falling behind in the tokenization of the banking industry with Europe and Asia leading the way according to a crypto banking report issued by Coincub.com.

Tokenisation in the Banking  Industry

William Quigley Co-founder of Tether stablecoin and Wax Blockchain explained tokenization  “Money and payments have been evolving for as long as they have existed.  The methods that society has used to store and transfer value during my life time have changed first by digitizing and now tokenizing.  Each major upgrade to the global monetary architecture has introduced both new benefits and new risks over the past several decades.  With digitization, the vast majority of what people generally think of as “money” is in reality ledger balances sitting on databases maintained by commercial banks.   As a general rule, banks use relational databases  primarily, but not exclusively running on UNIX and UNIX-like operating systems which was first developed in the 1960s.

Tokenization of the global financial system is still in the early stages but may have a transformative impact on the way ownership of commercial bank deposits, payments, government and corporate bonds, money market fund shares, gold and other commodities, real estate and other assets and liabilities are recorded on blockchains and other distributed ledgers,  enabling far-reaching new functions.

As detailed in Coincub.com’s Crypto Banking Report, a number of financial institutions around the world have been actively exploring the possibility of tokenizing assets to improve the way we transfer value using blockchain technology  to facilitate fast, secure, low-cost international payment processing services (and other transactions) through the use of encrypted distributed ledgers that provide trusted real-time verification of transactions without the need for intermediaries such as correspondent banks and clearing houses.  Notwithstanding recent advancements in digitization, our banking payment and settlement systems remain slow and inefficient for many users, with delayed settlements for large classes of transactions and numerous intermediaries, each adding  layers and layers of costs.

Tokenization and distributed ledgers have the potential to overcome many of these obstacles by globally operating around the clock and introducing settlement finality in real time. Because tokenization offers:

• Programmability — which will may make it easier for the bank and bank customers to automatically remove funds, to respond to liquidity stresses immediately and automatically, move liquidity when and where it is needed.

• Instant settlement — which will provide the ability to hard-wire on the ledger future transfers of value that automatically self-execute based on the occurrence of future conditions thereby increasing the speed and intensity of bank settlements.

• Atomic settlement – which will reduce the risk of loss in the time between payment and delivery or the simultaneous exchange and settlement of payment and delivery, including among multiple parties.

• Immutability of the shared ledger – which will  serve as a transaction record and reliable audit trail.  Blockchain based IT infrastructure can significantly reduce payment errors, cut down on account reconciliation time.  The transparency and immutability of the ledger can help regulators and law enforcement agencies obtain accurate and verifiable data on token transactions and seize assets from criminals.

While tokenization of the global financial system will face challenges and risks as financial institutions, developers, regulators, and other stakeholders continue developing the technology, we are already seeing examples of how tokenization is beginning to deliver tangible benefits in the global banking industry.”

Asset tokenization allows two broad asset classes that are represented by digital tokens on a blockchain– an immutable ledger– by conferring ownership of and legal rights to an asset (Token) on the Token holder.

1. Fungible assets such as stocks, bonds and funds that are both divisible and interchangeable, such that each token unit has the same value and market properties and can be divided into as many sub-divisions as desired when issued;

1. Non-fungible assets (NFT) such as commodities, art, intellectual property,  trees, land and real estate.  Non fungible tokens are unique, such that each one has its own value and market properties and thus cannot be replaced by other tokens.

At the end of the day, whether these Tokens are fungible or non-fungible  banks are needed to integrate fiat payments which  are incorporating blockchain technology to their businesses and offering  many traditional banking customers with digital asset services as follows:

Digital Asset Wallets:  Many banks received regulatory approval for their digital asset wallets  that includes payment processing, electronic transfer and exchange of digital assets.

Tokenized Cross Border Payments:  A settlement token can be seen as a bridge between other digital assets and fiat currencies, linking the digital asset economy with the banking world and increasing transaction ease and efficiency. Mastercard, JPMorgan, and some of the top banks in the United States are testing shared-ledger technology for tokenized asset settlements.

Credit Cards/Payment Services  Credit Card companies such as Mastercard, Visa and American Express, Discover Card  and Payment Services such as Paypal, Venmo, Cash App have a number of partnerships with digital asset companies, allowing banks and merchants in their network to offer crypto-related services and crypto reward cards to banking customers.

Digital Asset ATMs:  Digital Asset ATMs are owned and operated by third-party companies — the two largest networks are Coinhub and Coinme. To use a Digital Asset ATM, customers can simply insert cash or a Bank issued credit or debit card to exchange their traditional currency for Digital Assets.

Digital Asset Custody:  Many banks support digital asset custody services.

Crypto Trading Desks/ Wealth Management Services: Many large banks have launched crypto trading desks and wealth management departments with digital assets groups to help banking customers invest in cryptocurrencies, stablecoins, NFTs and Central Bank Digital Currencies (CBDCs) through their investment and retirement funds.

Stablecoins:  Tokenizing fiat currencies is the greatest innovation that will enable new mechanisms in global finance with stablecoins like Tether offering interest yields, in the coming years said William Quigley who co-founded the first ever fiat backed stablecoin Tether which is world’s most traded digital asset.   “Tether is the largest cryptocurrency in terms of trading volume, commanding 64% of the market share among stablecoins.   Having surpassed Bitcoin in 2019, Tether USDT became the most traded digital asset in the world.  As of May 4, 2024, Tether had over $110 billion , EUR 36 million, Yuan 20 million, Mex $ 19 million, AUDT 246K in circulation, leading to concerns about it being a systemic risk for digital asset markets and threatening the stability of wider financial markets.

BRICs countries have been eager to issue a stablecoin based on a basket of fiat currencies since 2017.  Tether launched #BRICST last year at the BRICs Summit a BRICS stable coin to be an alternative to the USD and USDT, and pegged to the Chinese Yuan, offering 10% per annum returns to meet this demand” added William Quigley.  The BRICS economic alliance is reportedly set to create a central bank of its own in order to issue its native currency which is central to the eventual creation of BRCIS currency.

CBDC:  134 countries & currency unions, representing 98% of global GDP, are exploring a CBDC which will tokenize the global financial/banking system by removing the need to use the correspondent banking system, which adds costs and delays to payments.

There are 36 ongoing CBDC pilots, including the digital euro with 11 of the Group of 20 (G20) countries in the advanced stages of CBDC development.  Two BRICS members, China and the UAE with another 23 central banks as observers are involved in  BRICS Bridge the similarly named cross border CBDC initiative that has sent Chinese Yuan cross border from UAE.

William Quigley said “In China the digital Yuan  “e-CNY” which was rolled out in 2020 could put China ahead of Europe and the United States in the global race to develop a CBDC that is used throughout their banking system.  E-CNY has so far been used mainly for domestic retail and public sector payments in the amount of 100 billion yuan ($14.5 billion), according to  data released by the People’s Bank of China.”

So far, 3 countries have fully launched a CBDC—the Bahamas, Jamaica and Nigeria.

By Selva Ozelli

The International Monetary Fund (IMF), the World Bank , Switzerland’s central bank (SNB) BRICS — the financial block originally comprised of Brazil, Russia, India, China, and South Africa, which added four more members in Iran, Egypt, Ethiopia, and the United Arab Emirates in the beginning of the year — and the Bank for International Settlements (BIS) have joined forces to leverage tokenization technology to streamline financial processes in banking and enhance global economic development .  The United States is falling behind in the tokenization of the banking industry with Europe and Asia leading the way according to a crypto banking report issued by Coincub.com.

William Quigley Co-founder of Tether stablecoin and Wax Blockchain explained tokenization  “Money and payments have been evolving for as long as they have existed.  The methods that society has used to store and transfer value during my life time have changed first by digitizing and now tokenizing.  Each major upgrade to the global monetary architecture has introduced both new benefits and new risks over the past several decades.  With digitization, the vast majority of what people generally think of as “money” is in reality ledger balances sitting on databases maintained by commercial banks.   As a general rule, banks use relational databases  primarily, but not exclusively running on UNIX and UNIX-like operating systems which was first developed in the 1960s.

Tokenization of the global financial system is still in the early stages but may have a transformative impact on the way ownership of commercial bank deposits, payments, government and corporate bonds, money market fund shares, gold and other commodities, real estate and other assets and liabilities are recorded on blockchains and other distributed ledgers,  enabling far-reaching new functions.

As detailed in Coincub.com’s Crypto Banking Report, a number of financial institutions around the world have been actively exploring the possibility of tokenizing assets to improve the way we transfer value using blockchain technology  to facilitate fast, secure, low-cost international payment processing services (and other transactions) through the use of encrypted distributed ledgers that provide trusted real-time verification of transactions without the need for intermediaries such as correspondent banks and clearing houses.  Because notwithstanding recent advancements in digitization, our banking payment and settlement systems remain slow and inefficient for many users, with delayed settlements for large classes of transactions and numerous intermediaries, each adding  layers and layers of costs.

Tokenization and distributed ledgers have the potential to overcome many of these obstacles by globally operating around the clock and introducing settlement finality in real time. Because tokenization offers:

• Programmability — which will may make it easier for the bank and bank customers to automatically remove funds, to respond to liquidity stresses immediately and automatically, move liquidity when and where it is needed.

• Instant settlement — which will provide the ability to hard-wire on the ledger future transfers of value that automatically self-execute based on the occurrence of future conditions thereby increasing the speed and intensity of bank settlements.

• Atomic settlement – which will reduce the risk of loss in the time between payment and delivery or the simultaneous exchange and settlement of payment and delivery, including among multiple parties.

• Immutability of the shared ledger – which will  serve as a transaction record and reliable audit trail.  Blockchain based IT infrastructure can significantly reduce payment errors, cut down on account reconciliation time.  The transparency and immutability of the ledger can help regulators and law enforcement agencies obtain accurate and verifiable data on token transactions and seize assets from criminals.

While tokenization of the global financial system will face challenges and risks as financial institutions, developers, regulators, and other stakeholders continue developing the technology, we are already seeing examples of how tokenization is beginning to deliver tangible benefits in the global banking industry.”

Asset tokenization allows two broad asset classes that are represented by digital tokens on a blockchain– an immutable ledger– by conferring ownership of and legal rights to an asset (Token) on the Token holder.

1. Fungible assets such as stocks, bonds and funds that are both divisible and interchangeable, such that each token unit has the same value and market properties and can be divided into as many sub-divisions as desired when issued;

1. Non-fungible assets (NFT) such as commodities, art, intellectual property,  trees, land and real estate.  Non fungible tokens are unique, such that each one has its own value and market properties and thus cannot be replaced by other tokens.

At the end of the day, whether these Tokens are fungible or non-fungible  banks are needed to integrate fiat payments which  are incorporating blockchain technology to their businesses and offering  many traditional banking customers with digital asset services as follows:

Digital Asset Wallets:  Many banks received regulatory approval for their digital asset wallets  that includes payment processing, electronic transfer and exchange of digital assets.

Tokenized Cross Border Payments:  A settlement token can be seen as a bridge between other digital assets and fiat currencies, linking the digital asset economy with the banking world and increasing transaction ease and efficiency. Mastercard, JPMorgan, and some of the top banks in the United States are testing shared-ledger technology for tokenized asset settlements.

Credit Cards/Payment Services  Credit Card companies such as Mastercard, Visa and American Express, Discover Card  and Payment Services such as Paypal, Venmo, Cash App have a number of partnerships with digital asset companies, allowing banks and merchants in their network to offer crypto-related services and crypto reward cards to banking customers.

Digital Asset ATMs:  Digital Asset ATMs are owned and operated by third-party companies — the two largest networks are Coinhub and Coinme. To use a Digital Asset ATM, customers can simply insert cash or a Bank issued credit or debit card to exchange their traditional currency for Digital Assets.

Digital Asset Custody:  Many banks support digital asset custody services.

Crypto Trading Desks/ Wealth Management Services: Many large banks have launched crypto trading desks and wealth management departments with digital assets groups to help banking customers invest in cryptocurrencies, stablecoins, NFTs and Central Bank Digital Currencies (CBDCs) through their investment and retirement funds.

Stablecoins:  Tokenizing fiat currencies is the greatest innovation that will enable new mechanisms in global finance with stablecoins like Tether offering interest yields, in the coming years said William Quigley who co-founded the first ever fiat backed stablecoin Tether which is world’s most traded digital asset.   “Tether is the largest cryptocurrency in terms of trading volume, commanding 64% of the market share among stablecoins.   Having surpassed Bitcoin in 2019, Tether USDT became the most traded digital asset in the world.  As of May 4, 2024, Tether had over $110 billion , EUR 36 million, Yuan 20 million, Mex $ 19 million, AUDT 246K in circulation, leading to concerns about it being a systemic risk for digital asset markets and threatening the stability of wider financial markets.

BRICs countries have been eager to issue a stablecoin based on a basket of fiat currencies since 2017.  Tether launched #BRICST last year at the BRICs Summit a BRICS stable coin to be an alternative to the USD and USDT, and pegged to the Chinese Yuan, offering 10% per annum returns to meet this demand” added William Quigley.  The BRICS economic alliance is reportedly set to create a central bank of its own in order to issue its native currency which is central to the eventual creation of BRCIS currency.

CBDC:  134 countries & currency unions, representing 98% of global GDP, are exploring a CBDC which will tokenize the global financial/banking system by removing the need to use the correspondent banking system, which adds costs and delays to payments.

There are 36 ongoing CBDC pilots, including the digital euro with 11 of the Group of 20 (G20) countries in the advanced stages of CBDC development.  Two BRICS members, China and the UAE with another 23 central banks as observers are involved in  BRICS Bridge the similarly named cross border CBDC initiative that has sent Chinese Yuan cross border from UAE.

William Quigley said “In China the digital Yuan  “e-CNY” which was rolled out in 2020 could put China ahead of Europe and the United States in the global race to develop a CBDC that is used throughout their banking system.  E-CNY has so far been used mainly for domestic retail and public sector payments in the amount of 100 billion yuan ($14.5 billion), according to  data released by the People’s Bank of China.”

So far, 3 countries have fully launched a CBDC—the Bahamas, Jamaica and Nigeria.

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