Wall Street Blockchain Pioneers Are Torn Over Crypto’s Gray Zone

(Bloomberg) — As Wall Street moves ahead of homegrown cryptocurrency players in the tokenization of real-world assets, mainstream institutions are grappling with whether to enter the gray area of ​​decentralized finance.

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This grey area, also known as DeFi, consists of projects that use automated software on top of blockchains to provide a variety of financial services. Such ecosystems are often outside the control of any one party, shrouded in regulatory uncertainty, and potentially open to a wide pool of participants.

The issue is whether Wall Street’s digital asset pioneers should intersect with these riskier crypto environments. The alternative approach for large institutions is to create blockchain-based representations of assets like bonds on closed digital ledgers or carefully navigate the use of tokenized products on public ones.

Steven Hu, head of digital assets, trading and working capital at Standard Chartered Plc, said that for some banks, full-scale decentralization in tokenization “will not be realistic or desirable.” “There is a critical need for a central authority to ensure the authenticity, uniqueness and proper use of the underlying asset.”

Standard Chartered expects a tokenization market of around $30 trillion by 2034, with trade finance accounting for 16%. The current market cap of cryptocurrencies is $2.4 trillion. Approximately $13.2 billion of real-world assets have been tokenized to date. Private credit is the largest segment at $8.4 billion, ahead of second-place U.S. Treasury bonds, according to rwa.xyz.

Black Rock, Franklin

Leading the treasury segment are BlackRock Inc. and Franklin Templeton, which manage government securities funds whose ownership is recorded on blockchains. The funds have acquired nearly $1 billion in assets since their launch in March 2024 and April 2021, respectively — represented by the BUIDL and BENJI tokens. That’s more than half of the total $1.8 billion in tokenized Treasury, according to rwa.xyz data.

Crypto-native players think restricted, private blockchains are unlikely to scale. Larger ecosystems will thrive on public blockchains, said Nana Murugesan, president of Matter Labs Inc., a company that aims to improve the usability of Ethereum, the major highway of commerce for digital assets.

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Franklin Templeton eventually expects BENJI tokens, which represent shares of the OnChain US Government Money Fund, to be tradable within the broader digital asset ecosystem. Currently, investors must buy or sell the token through the asset manager’s platform.

“We fully expect there will be a space in the future where BENJI holders can potentially transfer between each other,” said Roger Bayston, head of digital assets at Franklin Templeton.

Working with Regulators

Franklin Templeton’s fund had raised about $402 million in assets as of June 30. The company is currently working with regulators to figure out how a stablecoin could be used in a decentralized environment, provided participating wallets pass know-your-customer and anti-money laundering checks, Bayston said.

“I think we’re still working with regulators on how that process works,” he said.

BlackRock’s USD Institutional Digital Liquidity Fund, which invests in cash, U.S. Treasury bonds and repurchase agreements, has attracted about $527 million since its launch in March, according to Etherscan data.

Its availability on Ethereum, a public blockchain and instant refund mechanism have helped drive inflows, according to Carlos Domingo, co-founder and CEO of BlackRock-backed tokenization platform Securitize Markets.

DeFi protocols Ondo Finance and Mountain Protocol used BUIDL, the BlackRock fund’s token, to build their offerings.

“DeFi is the horse that pulls the tokenized RWA cart,” said Jeremy Ng, co-founder of OpenEden, which tokenizes short-term U.S. Treasury bonds. “Without this thriving on-chain economy, there would be no demand to tokenize these traditional asset classes in the first place.”

A Place for DeFi?

Permission-based or not, banks, asset managers, crypto players, and even regulators are exploring the potential benefits of tokenization. Project Guardian, led by the Monetary Authority of Singapore, brought together 24 financial institutions to test asset tokenization use cases, all with participation from JPMorgan Chase & Co., Deutsche Bank AG, Citigroup Inc., and Ant Group Ltd.

MAS is “cautious about crypto assets that have no underlying backing,” while the regulator sees “a solid use case for tokenizing financial assets” and will work with the industry to grow such assets, Chia Der Jiun, executive director of MAS, told a briefing.

Goldman Sachs Group Inc. has set out on its own to develop a digital asset platform called GS DAP, built on a proprietary blockchain that is used by the European Investment Bank and the Hong Kong Monetary Authority for bond issuances.

Whether such tokenization projects will extend to DeFi is still an open question. Franklin Templeton’s Bayston said that will happen over time as more adoption from regulators and others brings an understanding of “what public blockchains can do for the overall efficiency of capital markets.”

–With assistance from Chanyaporn Chanjaroen and Bernadette Toh.

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