While some banks have started experimenting with blockchain and distributed ledger technology (DLT), widespread migration to these systems are unlikely to occur due to a number of roadblocks, including regulatory and compliance challenges, the high costs of the endeavor, as well as uncertainties about the long-term benefits and potential disruption of the technology on existing business models, Benjamin Müller, an advisor on banking operations for the Swiss National Bank (SNB), said during an industry event last month.
At the Digital Monetary Institute symposium, held on May 10 and 11 in London, Müller took part in a panel discussion that brought together top executives representing Banque de France, Goldman Sachs, Clifford Change and SNB. The panel discussed asset tokenization, the opportunities brought about blockchain in capital markets, and central bank digital currency (CBDC) initiatives being undertaken by monetary authorities.
During the panel, Müller said that while asset tokenization offered many benefits, including speed and transparency, widespread adoption will be challenging. “We will not see a big bang migration into blockchain and DLT,” he said.
“I think this is not realistic and not good practice for regulated financial institutions.”
Instead, Müller predicts an “evolution” where two parallel systems could be running at the same time. That, however, will be a costly endeavor, he said, and it will take some time before the industry is able to harness the efficiency gains brought about the new technology.
Though it is unknown whether or not financial systems will be running on DLT in the future, Müller said that financial institutions and banks will most likely be playing a much bigger role in the digital asset sphere by facilitating access to tokenized assets.
Benjamin Müller
“The model that we have today is very well compliant with the model we could see when DLT and blockchain is used,” he said.
“We could very well imagine a world where we would have the two-tier financial system with intermediaries, banks and other financial institutions allow end-users to access such tokenized assets and to settle payments. It’s not necessarily in conflict.”
Asset tokenization, a process which involves representing the ownership rights of real-world assets as digital tokens on a distributed ledger, has been a popular trend among financial institutions.
Earlier this year, Swiss private bank Cité Gestion announced that it had become the first private bank to tokenize its shares under Swiss law. For the project, the bank teamed up with Taurus, a Geneva-based digital asset infrastructure provider. Taurus was in charge of tokenizing the shares, managing the smart contract and performing asset servicing of the securities, the companies said in a press release.
Taurus, which received a securities license last year from the Swiss Financial Market Supervisory Authority, said it had been involved in tokenizing 15 deals with Swiss-based and EU-based issuers, including banks and asset managers as well as small and medium-sized enterprises (SMEs) and startups since its inception in 2018.
The company counts among its clients the likes of Arab Bank Switzerland, CACEIS, Credit Suisse, Deutsche Bank, Pictet, Swissquote and Vontobel, and secured a US$65 million Series B funding round in February to support its growth.
SNB laid out its intend to “future-proof” the domestic payment ecosystem in March, outlining its ambition to leverage technologies and processes including tokenization and DLT to establish an “efficient, reliable and secure ecosystem” that’s geared towards “the future of cashless payments in Switzerland,” SNB governing board member, Andréa Maechler, said during an event.
As part of the plan, the central bank is investigating how central bank money can be made available in a regulated token environment. The project focuses on examining different models for token settlement, and is being undertaken in collaboration with the regulated financial market infrastructures and other market participants.
Separately, the Swiss Bankers Association (SBA) is exploring the concept of a privately issued, publicly accessible and programmable form of money. If carefully designed, this stablecoin could allow for a wide range of new applications, reduce risks, increase efficiency, and open up whole new areas of business, the industry trade group says.
Featured image credit: edited from Freepik
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