At FIA's Expo conference in Chicago on 2 October, a diverse panel of experts had a frank discussion about the future outlook for the technology and the path to widespread adoption of tokenized collateral.
The general consensus was that the industry is a long way from a widespread embrace of the technology, but market participants are still making steady progress and strategic investments in the future of this technology.
Hurdles to adoption of tokenization for collateral
Commissioner Caroline Pham of the US Commodity Futures Trading Commission said she was "not so optimistic" about the pace of adoption in the US – not necessarily because of the promise of tokenization, but rather the "lack of legal certainty" in the space.
"If we're leading with an enforcement-first approach over operational and technical issues, it's not a good regulatory environment" to foster innovation and investment, Pham said.
The Commissioner acknowledged that other jurisdictions could provide a model for the US, however, pointing to pilot programs in the EU and in Singapore that she has observed in her work as a sponsor of the CFTC's Global Markets Advisory Committee.
A more welcoming approach that leans more towards regulatory sandboxes and less towards enforcement could nurture the development of tokenization, she said, where "people do not have to worry about getting a subpoena on their doorstep" as they experiment with different but potentially more efficient ways of doing business.
On the industry side of things, panelists were a bit more optimistic but still clear-eyed about the challenges.
Helen Gordon, global head of clearing product development and strategy at JP Morgan, noted that her organization is working on a number of proof of concepts including its bank-led blockchain platform, Onyx. But she acknowledged that "proving you can move a low value tokenized asset in the real world is one thing, industrializing it is completely different."
Horacio Barakat, head of digital innovation at Broadridge, also acknowledged that securing internal investment for projects can be an uphill battle so "you have to be strategic about where to start."
"It's very difficult, if not impossible, without a regulatory mandate to get everyone to jump into the pool at the same time," he said. "If you were able to insert the technology in a portion of the value chain without driving significant change, you reduce your risk and then the further compounding effects of moving up or down the value chain could get you there without breaking the bank."
Challenges aside, tokenization holds promise
The concerns about internal resources and the broader regulatory environment aside, there's no doubt that tokenization of collateral was seen as a real solution to some of the inefficiencies in settlement processes and margining in derivatives markets.
Kelly Mathieson, chief business development officer at emerging software technology company Digital Asset, kicked off the panel by defining tokens as assets that "incorporate the workflow data or the lifecycle" of the asset as well.
That makes tokenized assets not just more liquid, but also more transparent.
"You can embed on that definition of that asset the eligibility criteria," Mathieson said. "The asset, digitally, can begin to let you know if it’s a suitable or transferable form of collateral."
She said this feature allows market participants and regulators to "think through a broader range of risk parameters and decision making."
Gordon of JP Morgan also said that, as an FCM, anything that can streamline the settlement of trades is good for her institution but also for the general management of risks in derivatives markets.
"We feel that having a much more instantaneous settlement process makes us much more confident that clients can meet their margin obligations," Gordon said.
Mark Wendland, chief operating officer and partner at DRW Holdings, said that his firm is currently pursuing innovative and tokenized assets in Treasury repo markets as a way to increase the return on its capital. But the ultimate end game for the industry is much bigger than simply generating extra yield in this market, and rather the "more efficient use of capital" across the board.
"Tokenization has potential benefits from efficiency but also to credit risk management, operational risk management, settlement risk management, for the entire industry as a whole."
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