How the latest TradFi blockchain trial could mark the ‘five-yard-line’ for mass adoption

The TradFi world has been exploring more ways to use blockchain tech for years now.

But the sheer number of financial players involved in the latest proof-of-concept makes it different from most. Not to mention the size of the entities, and their approach.

Payment giants Visa and Mastercard are coming together with banks JPMorgan, Citigroup and others to test a so-called Regulated Settlement Network.

The proof-of-concept sets out to experiment with shared ledger technology to settle tokenized commercial bank money, wholesale central bank money, US Treasury securities and other tokenized assets, a Wednesday news release notes.

Read more: Digital Asset Summit Day 2: Financial giants say theyre here to stay

This project represents a new phase of the Regulated Liability Network. Launched in November 2022, the initiative set out to demonstrate the use of shared ledger technology for regulated money movement on one platform.

The Securities Industry and Financial Markets Association (SIFMA) is set to manage the new proof of concept. Others involved include Swift, TD Bank, US Bank, USDF, Wells Fargo and Zions Bancorp.

Lamine Brahimi, co-founder of crypto platform Taurus, said he welcomes any initiative that puts cash on-chain at scale.

“The real benefits of tokenization will come when both the securities and the cash legs of a transaction are both on-chain,” he told Blockworks.

An evolution of projects

Financial players have long explored how it could unlock greater automation and more standardized data rails via blockchain tech while cutting costs and offering greater transparency.

Blockchain-focused proof-of-concepts and other tokenization efforts have seemed to ramp up in recent months.

JPMorgan‘s blockchain arm Onyx last year carried out tests under the Monetary Authority of Singapore’s Project Guardian to explore how fund managers could tokenize portfolios on various blockchains in a permissioned manner.

BlackRock used JPMorgans Tokenized Collateral Network to tokenize shares in one of its money market funds around the same time. It then sent those tokenized interests to Barclays as collateral for an over-the-counter derivatives trade.

Also under Project Guardian, Switzerland-based UBS brought a tokenized investment fund on Ethereum in November.

Even more recently, Citi tokenized a private equity fund issued by Wellington Management on Avalanches Spruce subnet in February.

Read more: Citi the latest TradFi player to test out asset tokenization

But the latest efforts revealed on Wednesday appear “incrementally more important” than prior trials, said Colin Butler, global head of institutional capital at Polygon.

“I say that because the parties mentioned are looking to align on a standard, to which theyre getting closer,” he told Blockworks. “This represents to me the five-yard-line for mass institutional adoption.”

The financial industrys approach to more recent blockchain projects is “qualitatively different” than in the past several years, said Ralf Kubli, board member of The Casper Association.

“It is clear that large institutions have decided that shared ledger technology offers a compelling value proposition in many critical areas of the value chain, and that they must be part of this development,” he explained.

Institutional involvement in this space has come through experimentation, or by investing in or acquiring startups with mature technology stacks, Kubli noted.

The Depository Trust and Clearing Corporation (DTCC) closed its deal in December to acquire Securrency — a blockchain-based financial and regulatory technology developer.

The worlds largest asset manager last week led a $47 million funding round for Securitize, a firm focused on bringing physical and traditional financial assets on-chain.

Read more: BlackRock doubles down on tokenization via investment in Securitize

“This strong commitment by established financial institutions will drive the emergence of enterprise grade infrastructure by startups and spinouts, as well as provide a glimpse on the future interaction between public chains and permissioned environments,” Kubli told Blockworks.

Proof-of-concept expectations

The proof-of-concept will publish an analysis of whether the network could operate under existing laws or guidance in the United States. Findings intend to inform “next generation settlement models,” SIFMA said in a news release.

Brahimi said he hopes to see “the confirmation of major efficiency gains” by having both securities and cash on-chain. The experiment could also demonstrate reduced counterparty risk and improved collateral transfers between institutions.

“A legal assessment of what needs to be modified to scale these activities will also be useful,” he added. “Based on the projects Taurus is involved in, it will be faster than what people think.”

Read more: Tokenization top of mind for Taurus in 2024 after FINMA approval

Morgan Krupetsky, who leads business development for institutions and capital markets at Ava Labs, said she is encouraged by the array of entities involved.

Still, more buy-side participation from asset managers, corporates, hedge funds and pension funds, for example, in such blockchain trials would be beneficial. Having that segments buy-in and support will be critical, she added.

“They often experience comparable pain points, [and] theyre increasingly viewing this space as a strategic imperative,” she told Blockworks. “[It] would provide valuable input and insight to the banks who ultimately service these, and other, clients.”

Those anxiously awaiting an overhaul of legacy financial services infrastructure and systems will have to stay patient.

The lengthy experimentation ultimately helps financial institutions, infrastructure providers and regulators assess the benefits of dedicating resources to ultimately building products that use shared ledger tech, Krupetsky explained.

Kubli added: “I believe we will see serious and productive environments in the coming six to 12 months as part of the various peer-to-peer engagement…and more importantly, through the various sandbox approaches and central bank-led initiatives, including the [Bank for International Settlements].”