Over the past month there have been a number of high profile announcements by TradFi and DeFi players building tokenisation products and protocols. One of the fundamental principles of DeFi is to remove traditional financial intermediaries from transactions and financial instruments, making them trustless, verifiable and settled on-chain therefore making them transparent and immutable.
Traditional Financial institutions, although slower to engage, have been quietly building over the last few years, piloting and testing real-world regulation compliant solutions for a number of financial transactions, often in partnership with central banks and financial regulators in many jurisdictions across the world. Part R&D, part pilot- programmes for bigger projects, many of these are a direct challenge to DeFi’s claim to be the only ‘way’ to build financial services on-chain.
Institutional clients need custody and tokenisation solutions to support both public (think Ethereum, Polygon, Solana etc.) and permissioned blockchains (think Hyperledger BESU, Quorum, etc), and other enterprise-grade private blockchains (EVM and non-EVM) to meet the growing demand from the biggest US and European banks and their institutional clients.
Here is our round-up of interesting projects/protocols in the news and why these highlight the growing focus on RWAs as TradFi’s domain:
Betting on Tokenisation
Everyone’s digital asset infrastructure platform, Fireblocks, is betting on tokenisation with its purchase of Blockfold. This acquisition was most recently involved with National Australia Bank’s first cross-border intra-bank stablecoin transfer. BlockFold assisted with the smart contracts and direct custody of the tokens. As Michael Shaulov, Fireblocks CEO, said:
“We already speak a common language in understanding these customers’ requirements at an architectural level. Bringing BlockFold’s expertise in-house means that we can better serve tier-1 financial institutions to quickly and seamlessly bring tokenization projects into production and new assets onto the blockchain.”
Fireblocks has already been involved in stablecoin projects, including a tokenization project with the Israeli Ministry of Finance and the Tel Aviv Stock Exchange which plans to tokenize the entire Israeli debt market over the next few years. Infrastructure platforms are looking to add tokenisation to their product offerings, and there will be more acquisitions in this space over the coming months as bring RWAs on-chain is the next holy grail for blockchain and infrastructure-focused protocols.
The Swiss-based institutional-grade digital asset platform, Taurus announced it too was expanding its custody and tokenisation offerings. Taurus is the only custody and tokenisation provider in the world capable of bridging assets between private and public blockchains. Their clients can now effortlessly tokenize any type of assets on public and permissioned (private) blockchains via their unified platform. This capability is vital for large financial institutions, particularly in the US, who leverage both permissioned and public chains to issue tokenized assets. As Vassili Lavrov, Head of Product at Taurus said in a statement:
“We realised that our clients often manage multiple use cases running across public or permissioned blockchains on different platforms, some of which are custom-made and difficult to maintain. By providing full public and permissioned blockchain support through Taurus-PROTECT, Taurus-CAPITAL, and Taurus-EXPLORER, we elegantly solve this problem, reducing costs and risks for our clients.”
Their platform can issue any asset type in digital form and manage its entire lifecycle on platforms such as Ethereum, Tezos), and Polygon. Moreover, clients can integrate and interact with any type of smart contract without limitations. This level of interoperability was thought to be impossible to achieve with full regulatory compliance but the Swiss are already building the infrastructure needed to make this a reality.
The First Ethereum MMF
Ethereum’s institutional upgrade continues at pace. The Swiss, always one step ahead when it comes to digital assets, announced UBS’s launch of another ‘first’ - the live pilot of tokenised Ethereum Money Market Fund (or MMF) this week.This latest tokenized MMF pilot is part of Project Guardian — a collaborative industry initiative led by the Monetary Authority of Singapore (MAS). The fund is structured as a variable capital company (VCC) — a new legal entity form for all types of investment funds in Singapore.
Project Guardian currently has live pilot programmes underway in Asset & Wealth Management, Fixed Income, and Foreign Exchange with UBS, Citi, Schroeders, HSBC, DBS Bank, JP Morgan, to name but a few of the TradFi players involved in this one initiative under Singapore’s financial regulators. This highlights the level of investment and development going on within Traditional Financial institutions to test and build compliant on-chain financial instruments, executive and settlement capabilities.
Not to be left out of the party, Circle rolled out Perimeter Protocol, an open-source foundation to build tokenized credit markets on its free-to-use smart contract code base. This has the flexibility to support various credit use cases, including invoice factoring, payroll advances, instant settlement for merchants, and credit trading for institutional investors. Stablecoins, like Circle’s beleaguered USDC, play a key role in settling transactions within blockchain-based lending markets. By facilitating tokenization efforts and the development of DeFi credit platforms, Circle aims to enhance the utility of its stablecoins, including the $26 billion USDC and its recently launched euro-pegged token EURC. Securely unlocking on-chain credit can bring traditional RWA credit markets on-chain in a safe and compliant way.
Perimeter brings us to the world’s largest debt market on-chain: US T-Bills. Yes, US Treasuries, that trillion-dollar market, is coming on-chain to you courtesy of Franklin Templeton and Ethereum.
This is a great graphic illustrating the trade-offs between those protocols that offer actively managed/TradFi regulated products and those offering more passive/DeFi products. Note the lack of protocols in the bottom left corner of the Matrix. With a current value of circa $664m, our friends at RWA.xyz have done a great research report on Tokenised Treasuries and the opportunities this represents to bring large inflows of capital on-chain.
These announcements all illustrate how TradFi is using RWAs as a gateway to onboard institutional clients into tokenisation and the investment opportunities this represents not just for financial institutions but for DeFi and those protocols delivering institutional-grade regulatory compliance for clients and institutional investors. Ethereum is playing the long game with its institutional upgrades and roadmap to achieve institutional level scalability, security, and throughput.
DeFi needs to start seeing how the game is being played outside Web3 by TradFi and start playing to win market share. The real money is already playing the long game; the question is how long before they can play it better than DeFi.