Cryptocurrency firms may still be licking their wounds, but a slew of major financial companies including JPMorgan Chase & Co, HSBC Holdings Plc and Franklin Templeton are flipping the switch on new systems built around blockchain, marking an acceleration into 2024.
In the past week, a blockchain technology company backed by Goldman Sachs Group Inc, UBS Group AG and Banco Santander processed the first payments through a platform that’s been in the works for several years. Deutsche Bank AG’s asset manager, DWS Group, said on Wednesday it had partnered with firms including market-maker Flow Traders, to set up a company that will issue a stablecoin. The flurry of year-end launches underscores how digital finance — employing so-called distributed ledger technologies with the goal of faster, safer and cheaper transactions — is overcoming lingering skepticism on Wall Street. But it’s still to be seen how quickly these applications can achieve scale.
To commercialize new systems for complex processes such as settlement, firms need buy-in from myriad financial companies and — most crucially — regulators, many of whom are hypervigilant after last-year’s wave of crypto implosions and scandals. The new technology needs to match the resilience of traditional systems when working at scale. It must also interface with older, clunkier infrastructure, ranging from traditional payment rails to compliance software. Conceived as a cost-cutting experiment, Franklin Templeton’s blockchain mutual fund ultimately took four years to implement. Everything was built from scratch, starting with the most basic technology like digital wallets specially tailored for a regulated entity. To prove to regulators that the records of transactions kept on the blockchain were accurate, it ran a months-long pilot project in conjunction with the US Securities and Exchange Commission.
Here’s a look at some of the other projects in the market after a busy year:
Staying Small
So far, there’s been limited use of the blockchain-based services that have gone live. Sometimes, that’s by design.
“We are staying small and building into it,” said Alex Holmes, chief executive officer of MoneyGram, which launched money transfers via stablecoins in 2022 and this year announced plans to debut a non-custodial digital wallet in early 2024.
Of about 2,000 staff, only about 20 or so are working on the blockchain effort full-time, he said. “It’s somewhat proportional to the expectations around some of the revenue and profitability.”
For now, the company only works with Stellar, a relative minnow among blockchains. Regulatory concerns mean that MoneyGram uses its own corporate cash, rather than that of its clients, when settling with its cryptocurrency issuer, Circle.
Crypto Revival?
Skeptics argue that much of the excitement professed on Wall Street for blockchain systems is actually cover for the fact that they now need to keep their digital asset teams busy with something less risky than crypto.
According to Arnab Sen, the chief executive of crypto derivatives platform GFO-X, cryptocurrencies will once again be a topic of conversation if the SEC approves a handful of exchange-traded funds investing directly into Bitcoin.
Speculation about that decision has helped lift the price of Bitcoin this year. GFO-X raised $20 million from the asset management arm of pensions giant M&G Plc last week.
“The timeline for the tokenizing of real world assets to deliver meaningful commercial benefits — and the probability of it ever doing so — relative to the commercial opportunity of trading Bitcoin as an asset class is extremely limited,” Sen said.
Signs of Life
Still, there was proof this year that growth can happen relatively fast, once new services are up and running.
The $1.5 billion worth of transactions JPMorgan handles daily through its blockchain applications — including payments system JPM Coin and a network for tokenized collateral — has doubled in the past 12 months.
That may be a fraction of the $10 trillion in US dollar payment transactions that JPMorgan processes daily, but Wall Street’s blockchain proponents see it as proof the underlying technology is commercially viable.
“It’s big enough that it can be looked at and audited,” Umar Farooq, CEO of the firm’s blockchain division Onyx, said in an interview.
The bank went live with its first collateral settlement for a trade between BlackRock and Barclays using the Onyx Digital Assets blockchain in October. It launched programmable payments the following month and is exploring a deposit token.
After nine months’ work by about two dozen engineers, product managers and compliance staff, the tokenized collateral settlement took a matter of seconds to complete — as executives looked on via video call, Farooq said.
“These applications are sort of living entities, we’re growing their client base and what assets are included,” Farooq said.
Stablecoin
Activity is also picking up around stablecoins issued by traditional financial firms.
French asset manager AXA Investment Managers, started laying the ground in the summer for its first market transaction using the tokens, which are pegged to less volatile assets and hold a steady price, according to Laurence Arnold, the company’s head of innovation and strategic initiatives.
The deal went through in December, and allowed AXA IM, using Societe Generale’s euro-denominated stablecoin, to invest in a tokenized green bond issued by the bank on the public Ethereum blockchain.
Blockchain’s use in finance may seem slow, “but it’s moving on,” Arnold said. “There are more issues, there are more solutions, there are more discussions. There is more common work.”
Boosting Liquidity
Going into 2024, the foundations of a blockchain network are emerging, with some areas looking more promising than others.
“We are genuinely at the cusp of scaling applications,” said John Whelan, managing director for crypto and digital assets at Santander’s corporate and investment bank.
The bank has been involved in several tokenized bond issuances and was one of the first users of a blockchain-based wholesale payments system by London-based Fnality this month.
Applications that move collateral via the blockchain may take off faster. They require the involvement of fewer financial institutions and have more tangible benefits, Whelan said. At scale, the technology could increase efficiency by freeing up locked capital. “The job of liquidity managers is to optimize liquidity of a bank,” Whelan added. “So if you are able to have a tool of any kind that can squeeze a few extra basis points, that’s an easy story to tell.”
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