It’s no secret Wall Street firms conduct thousands upon thousands of transactions per day, with trillions of dollars changing hands at any given time. While the financial markets continue to grow, there is still a great deal of inefficiency and opportunity missed for institutional firms. Since the move from paper records to electronic trading, there has yet to be a further advance in financial market technology. Now, with blockchain proving its value in increasing market efficiency and decreasing costs, Wall Street firms stand ready to take advantage of this new technology to enhance their network and market power.
The inefficiency of current markets
The equities markets alone account for $58 billion a year in transactions. Assets of all kinds, from real estate to gold to stocks and more, are all heavily traded across financial markets. Since many of these assets are tough to trade in their physical form, paper forms of their ownership were created for trading purposes. Paper forms have been replaced with electronic transactions and agreements via commodities and other asset exchanges.
However, these electronic exchanges do not come without problems. Structurally, they are operated by a single controlling entity, which has power over the exchange and all information coming in and out of it, never having to provide traders transparency and insight into how the exchange is conducting transactions. Additionally, latency – a delay or lapse in time between a network request and response – is an issue for many financial firms, where a fraction of a second or fraction of a penny can be the difference between trade execution and profit. It has even been reported high-value customers receive data before everyone else on some market platforms.
The benefits of tokenization
Unbelievably, we still live in a world in which it takes several days and significant fees to complete financial transfers across the globe. As institutional firms look to reduce costs along with lag time for transactions, the idea for tokenizing assets has gained traction for a variety of reasons.
There are a host of different assets that are considered intangible, and thus, have never been adequately valued or bought and sold. Things like carbon credits, patents, and copyrights could be tokenized and made much more easily transferable. Blockchain startups like LEXIT are already working on protocol solutions to create marketplaces for intangible assets, which would be welcomed by Wall Street institutions.
The ability to divide assets infinitely opens markets to more investors, and therefore, more transactions for financial institutions. An investor who previously could not afford to purchase one ounce of gold on the commodities market could potentially buy the equivalent of 0.0001 ounces of gold via a tokenized, and subdivided form, of the asset. As more transactions are processed, Wall Street firms benefit from facilitating these transactions and collecting on trading fees. The more an asset can be subdivided, the more opportunity there is for trading and diversification for investors and for asset holders to create a market.
Many assets are not readily tradable in their current forms. Limited Partner (LP) shares in a venture capital or private equity fund, or investment in commercial real estate are hard to trade because there is no such market to value such assets. Tokenization of these assets creates entirely new markets and provides investors with liquidity in situations where there previously was none.
What are the big firms doing?
While cryptocurrencies gain in popularity among the general public, financial institutions have been working on their own tokenized solutions for years, with news surfacing recently of progress in this area of research and development across the financial sector.
Goldman Sachs is getting into the crypto-trading game by adding a cryptocurrency trading desk to its repertoire, along with its acquisition of Circle, a blockchain peer-to-peer payments company. However, the biggest mystery is the company’s patent filing for what it called “SETLcoin” back in 2014, a development which was recently made public. SETLcoin is designed to exchange assets such as securities, cash, and cash equivalents via blockchain technology and, along with its other cryptocurrency investments, could make Goldman a leader in the industry.
Citigroup is working on a cryptocurrency of its own, dubbed “Citicoin,” to facilitate payment and trade better within in the finance industry. The company is testing three individual blockchains and has made it clear they believe that “the adoption of Digital Money is inevitable.”
JPMorgan is not only working on blockchain solutions for payments and asset trading, but also for enterprise solutions. The bank’s Quorum project, in partnership with IBM and Ethereum, is an enterprise-level distributed ledger solution for conducting large amounts of private transactions.
UBS Bank has been developing cryptocurrency solutions for several years with the hopes of connecting cryptocurrencies to central banks, allowing tokens to be backed by real-world assets and tradable between institutions. This idea for a “utility settlement coin” is planned for a limited launch this year and will allow for global banks to exchange value in the form of equities, bonds, and payments in digital tokens without ever having to transfer fiat currency between them.
Crypto Players
In this new tokenized economy there are opportunities for decentralized projects to build the infrastructure necessary to support this new form of asset trading and financial transactions.
Polymath is digitizing everything from venture capital investment, real estate, commodities, and more. With Polymath, anyone can create security token for trading on a fully KYC compliant marketplace. tZero is a secondary market for decentralized securities of all kinds. By reducing settlement time and transaction costs, tZero will create more efficient capital markets in a transparent, trustless fashion.
LEXIT will allow startups and companies to sell intellectual property, copyrights, and entire businesses through the blockchain. The LEXIT decentralized network verifies listed offerings and creates a highly liquid market for M&A deals which were never before thought possible.
A tokenized future
This tokenization adds up to even more profits for Wall Street firms, which is why the major institutions are gearing up for a technological overhaul to try and capture as much of this market as possible.
All signs point to a future filled with digitized assets ranging from oil to a share of stock as well as a global payments network operating at much higher efficiency. Many questions remain regarding how this will play out in the market and how the developments by Wall Street firms will affect decentralized currencies like Bitcoin and Litecoin. But one thing’s for certain; these financial behemoths will do everything in their power to profit from this new technology powering the financial revolution.
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