Comptroller Hsu says tokenization doesn’t need blockchain. Again.

Yesterday, Acting Comptroller of the Currency Michael J Hsu, gave a talk about cross border crypto-asset regulation as part of a Financial Stability Board (FSB) workshop. At the end of his remarks, he posed the question of the link between blockchain and tokenization.

“Crypto advocates have cited tokenization as a key use case. But if blockchains are not necessary to achieving that, one wonders what the future landscape of tokenized real-world assets and liabilities might look like, and what the financial stability profiles of different scenarios might be,” he said.

It’s not the first time he’s noted that tokenization doesn’t have to use blockchain.

Tokenization and blockchain

In his talk, Mr. Hsu also referred to a tokenization event held by the Office of the Comptroller of the Currency (OCC) earlier this month, in which he said that “blockchains and distributed ledgers were barely mentioned.” First off, the OCC created the agenda, which mainly included academics and regulators as speakers. No commercial banks participated on the panels and blockchain was not part of the agenda. 

Secondly, there were some major exceptions, particularly the only panel that included industry practitioners, which focused on tokenization use cases. Our rough transcript of that session found that the phrase ‘blockchain’ was mentioned more than 30 times during 45 minutes.

At the same event, Hyun Song Shin of the BIS also discussed tokenization. We previously highlighted that the BIS paper on its Unified Ledger concept focused on tokenization but didn’t mention blockchain. In his talk at the OCC event, Mr. Shin emphasized that discussion about concepts such as tokenization should start from a technology-agnostic perspective.

“Tokenization is not synonymous with decentralization or blockchain or any other mention of the technology itself,” he said.

“What’s important here is the functionality of enabling the contingent performance of actions (programmability), and that can be done on a centralized platform, decentralized platform or indeed with the permissioned DLT systems – they sort of fall somewhere in between centralized and decentralized.”

Broader tokenization benefits

There’s no question that business problems require functional solutions and the technology choice should be secondary. At the same time, should one limit the potential functionality in order to avoid using a particular technology? Especially if that functionality could potentially address major frictions and save large sums of money.

The programmability aspect of tokenization is important. But it’s also about composability. It’s about creating large open networks where assets can move with minimal friction. Interoperability is necessary, but compared to institutions’ current fragmented tokenization efforts, there should be a smaller number of large open networks.

Most importantly, consumers should be able to move far more easily between intermediaries.

Today that movement is full of friction. To buy an asset, you currently have to sell assets locked at one intermediary (eg. a broker) and wait for days to receive the money. Then, you go to another intermediary to buy a different kind of asset, such as a piece of real estate or art. This all takes quite a bit of effort.

In the future most things will be available via a single wallet and almost instantaneously. You may work through multiple intermediaries or ‘protocols’, but the transition will be seamless. Often you will be able to choose to keep the first asset and instead use it as collateral to buy a different type of asset.

Why regulators have blockchain reservations 

At a more general level, regulators have expressed several reservations about blockchains. A big part of the reluctance may come from the conclusion that a large proportion of consumer financial activity could eventually be on public blockchains. That’s even if the work starts in a private blockchain environment. Not only would regulators struggle to influence the governance of public blockchains, weakening their ability to do their jobs, but public blockchains run on cryptocurrencies.

The regulators’ response to Facebook’s Libra/Diem illustrated that they generally find stablecoins and cryptocurrencies a threat. That’s not just to financial stability but to their own roles and the power of central banks.

That’s the big picture concern. Then there are plenty of more detailed ones. There’s the tendency of regulators to overstate the fraud and anti-money laundering usage compared to cash and the banking system, though fraud is unquestionably an issue.

From a technical perspective, blockchains suffer from poor scalability and the bearer nature of many instruments. That means the private key holder is the owner, resulting in a theft risk similar to cash. Additionally, there’s currently weak interoperability.

While there’s a shopping list of issues to be concerned about with blockchain, tokenization clearly presents a massive opportunity that the likes of the BIS recognize. What’s more likely is some aspects of that tokenization will be centralized – think central bank money – and some aspects may not be. 

Rather than dismissing a technology, it’s worth exploring the potential of tokenization as currently envisioned. That vision came from the blockchain ecosystem. Then ask what would you miss without blockchain? In the absence of a concrete alternative proposal, benefits such as large open networks, market driven innovation, composability and true (versus limited) mobility could be missing.

Nomura’s Laser Digital backs Singularity for permissioned, confidential DeFi

Yesterday blockchain startup Singularity announced it raised a $2.2 million funding round led by Gumi Cryptos Capital, bringing total funds raised to $4 million. Nomura’s digital asset arm Laser Digital was a new investor alongside Eureka partners. 

Singularity aims to provide a compliant institutional access layer to decentralized finance (DeFi). This combines know your customer (KYC) compliance with on-chain anonymity by using zero knowledge proofs.

Institutions don’t usually like others to be able to see what they are up to. Hence the desire for anonymity.

Other public blockchain solutions aim to provide similar functionality, but the architecture varies. Singularity appears to be close to the Ethereum composability ethos – it primarily provides the KYC and anonymization solution. So permissioned users can use popular DeFi protocols without others being able to see what they’re up to.

Some other offerings expect to capture all the transactions on their own Layer 2 blockchains. One example is Obscuro, founded by the former Chief Engineer of enterprise blockchain firm R3. However, Obscuro also addresses an additional challenge. Transactions on public blockchains such as Ethereum can viewed before they happen. That encourages front running and other activity, so-called miner extractable value (MEV). Obscuro addresses this by using encryption and special hardware. EY also developed a Layer 2 confidentiality solution, Polygon Nightfall.

Circling back to Singularity, the solution hasn’t yet launched but plans to with liquid funds, asset managers and venture capitalists, including many of its investors.

“We look forward to launching in the coming months with our early institutional users,” said Jemma Xu, co-founder of Singularity. “We have an exciting product roadmap ahead with more integrations and multichain deployments. Our immediate focus is on growing our institutional user base.”     

Previous Singularity investors include Apollo Crypto, Digital Asset Capital Management, and Gandel Invest.

City of St Gallen to issue CHF 100 million digital bond on SDX

The Swiss City of Saint Gallen will use the SIX Digital Exchange (SDX) to issue a CHF 100 million, three year digital bond. This is the fourth municipality to issue a digital bond on SDX in the last three months. It coincides with wholesale central bank digital currency (CBDC) trials conducted by SDX, where the wholesale CBDC issued by the Swiss National Bank is used to settle the bond issuances.

The Canton of Zurich (CHF 100 million) and City of Basel (CHF 105 million) issued bonds in November and Lugano issued a second CHF 100 million bond earlier this month. All were settled with the CBDC.

Basler Kantonalbank, UBS and J. Safra Sarasin are the lead managers for the St Gallen issuance. 

To date, all the bonds listed on SDX have been denominated in Swiss Francs and are issued under Swiss law. However, last year FINMA gave the green light for bonds denominated in euros, including settlement using tokenized euros. With a wholesale CBDC Swiss Franc or tokenized euros, SDX enables atomic settlement or delivery versus payment, removing counterparty risks.

Last September SDX announced plans to list tokenized foreign bonds. In other words, conventional bonds which are issued elsewhere. Earlier this week SDX published a rule change allowing the listing of bonds under foreign law. The certificates for the underlying conventional bonds must be held in a recognized depository.

So far, most of the issuances on SDX have been for large institutions, such as SIX, UBS and the four municipalities. Now SDX is gunning for smaller firms with at least CHF 25 million in equity and looking to issue a bond of over CHF 20 million.

Germany’s Bankhaus Scheich tokenizes Euro money market fund on Polygon

Tradias, the fintech technology arm of Bankhaus Scheich, has tokenized a money market fund, the Allianz Securicash SRI Fund. A Dutch crypto trading platform has invested in the token as part of its treasury management. Like other tokenized  money market funds, the issuance amount will grow over time based on demand. The initial amount was not disclosed.

Bankhaus Scheich is one of the leading market makers on the Frankfurt Stock Exchange, so the issuances use its existing regulatory licenses. 

In this case the benefits touted are the ability to trade the token 24/7 and the cost structure. But given it’s currently a one-off token, the question is with whom can it be traded? In the same way that Tradias provides an API and user interface for trading Bitcoin or ETH, it also provides a price for the tokenized money market fund. Additionally, it plans to make the token available via other platforms.

“We’re offering a forward-thinking solution for managing liquidity with tokenized money market funds,” said Michael Reinhard, CEO of tradias. “Investors and individuals investing in cryptocurrencies and digital assets now have the opportunity to manage their liquid funds based on a token while achieving money market equivalent returns.” 

Other tokenized money market funds

To date most of the money market funds that have been tokenized on public blockchains are based on U.S. investments. They’ve proven popular given stablecoins don’t pay interest. 

For example, there’s Franklin Templeton’s OnChain Government Money fund (market cap of $324m) and Ondo Finance tokenizes the iShares Short Treasury Bond ETF (market capitalization: $113m).

In some ways the tradias tokenization falls between the two. On the one hand, Franklin Templeton is a highly regulated asset manager and Bankhaus Scheich is a regulated bank. In contrast, there’s limited oversight with Ondo Finance. However, Ondo is tokenizing an existing fund that it doesn’t manage, and so is tradias.

The tradias tokenization was on the Polygon blockchain.

ECB hints regulators could pursue Bitcoin miners

Today the European Central Bank (ECB) published another article critiquing Bitcoin and cryptocurrencies more generally. The primary gist is that an ETF doesn’t change the ECB’s belief that Bitcoin is unsuitable for investment or payment. However, that was not the most notable point. It asks whether there’s been a misjudgment by authorities regarding regulating cryptocurrencies under pressure from “well-funded lobbyists” and social media campaigns.

One of the authors is Ulrich Bindseil, the Director General of Market Infrastructure & Payments.

“It seems wrong that Bitcoin should not be subject to strong regulatory intervention, up to practically forbidding it,” the authors wrote.

Earlier this week a European Commission adviser, Peter Kerstens, said it would be hard to find a legal basis to ban Bitcoin in the EU Treaty.

Target DAO and Bitcoin administrators

Decentralized autonomous organizations (DAOs) are often used for decentralized finance (DeFi) governance. The ECB pointed to a recent SEC case in the US. The BarnBridge DAO settled after “pressure on its founders”. Hence, it asserts that if you can identify administrators, you can prosecute them. That’s similar to the position of IOSCO, the international body for securities regulators.

The ECB wrote that “this principle also applies to Bitcoin. The Bitcoin network has a governance structure in which roles are assigned to identified individuals. Authorities could decide that these should be prosecuted in view of the large scale of illegal payments using Bitcoin. Decentralised finance can be regulated as forcefully as the legislator considers necessary.”

However, European Commission adviser Peter Kerstens said one shouldn’t assume that the regulation of DeFi will get a lot of coverage in the EU’s MiCA follow up paper.

The ECB also criticized Bitcoin’s energy usage. It highlighted the failure of the EU and US to take steps to address it. In March 2022, during the Regulation on Markets in Crypto Assets (MiCAR) debates, the Greens and S&D political parties attempted to ban blockchains such as Bitcoin, which uses Proof of Work. They lost the vote.

Shipping blockchain network GSBN adds Portbase, ICTSI and Westport as members

Today the Global Shipping Business Network (GSBN), the blockchain network for paperless trade, announced the addition of three new members. International Container Terminal Service (ICTSI) is the world’s largest independent port operator and joined last year. The others are Dutch port software firm Portbase and Malaysian port operator Westports.

GSBN was incorporated in 2021 as a Hong Kong-based nonprofit. Founding investors include COSCO SHIPPING LINES, COSCO SHIPPING PORTS, Hapag-Lloyd, Hutchison Ports, OOCL (COSCO owned), SPG Qingdao Port, PSA International and Shanghai International Port Group.

Deploying GSBN Cargo Release

ICTSI took just two weeks to deploy the GSBN Cargo Release offering with Contecon Manzanillo, one of Mexico’s major container terminal operators. It could potentially deploy GSBN products across 32 terminals in 19 countries.

In the Netherlands, Portbase’s Port Community System (PCS) provides communication software for logistics across containers, general cargo and bulk cargo. Integrating Portbase and GSBN allows data to flow across both networks for joint users.

This will help with GSBN Cargo Release. Releasing a container at the arrival port requires communication between the shipping line, consignees, their agents and terminals. Portbase can help with that, as much of the process has already been digitized with its software.GSBN Cargo Release adds a layer of security, preventing cargo release to unauthorized parties because digital documents are authenticated.

“By connecting with GSBN’s trust- by-design data platform on behalf of our joint users, we enable scalable, secured data exchange between the Dutch ports, their hinterland community and GSBN’s global shipping network,” said Iwan van der Wolf, CEO and Managing Director at Portbase.

COSCO SHIPPING Lines is one of GSBN’s backers and these integrations are a step forward. “The collaborative efforts, especially with partners like Portbase and global terminal operators with a strong group digital platform infrastructure such as ICTSI, offer a streamlined operational process for customers globally,” said Yan Li, Managing Director of COSCO SHIPPING Lines.

Both Portbase and ICTSI were also members of IBM and Maersk’s TradeLens shipping network, which shuttered last year.

Meanwhile, last year GSBN announced a few other important partnerships. Saudi Aramco’s SABIC started using GSBN for electronic bills of lading (eBL). Japanese shipping carrier ONE joined the network, adding to the existing carriers COSCO Shipping Lines, Hapag Lloyd and OOCL. Additionally, GSBN partnered with China’s fintech giant ANT to tokenize eBLs.

UK Finance Chair joins board of enterprise blockchain firm R3

Today, enterprise blockchain firm R3 announced that Bob Wigley was appointed as non executive director in October 2023. On his LinkedIn profile, he describes himself as an investor. Wigley has been the Chair of the industry body UK Finance for the past six years. He’s also the former Chair of Merill Lynch Europe and has extensive relevant experience.

Last year UK Finance called for government support in adopting tokenized securities. Now the UK Digital Securities Sandbox is already live. At the time, UK Finance also published a report outlining the path for the UK to becoming a leader.

Additionally, in conjunction with UK Finance, EY is coordinating the UK arm of the Regulated Liability Network. That initiative aims to support bank-based tokenized deposits. It has yet to decide on a technology.

“I’m delighted to join R3 at a time when R3 Digital Markets is transforming the way global financial markets operate,” said Wigley. “R3 is the catalyst behind pioneering CBDC and other real financial asset tokenization projects, and I look forward to working with the team and its customers to continue driving adoption in new geographies and asset classes.”

Apart from his role at UK Finance, Wigley was an advisor to for three years. He was also the Founding Commissioner of the Blockchain Commission for Sustainable Development, which advises governments. Additionally, he is an Honorary Fellow at Judge Business School within Cambridge University’s Centre for Alternative Finance and an Honorary Professor at the Digital Futures Institute at King’s College London.

“His insight and strong industry connections will be an invaluable addition to our board, at a time when R3 is working with financial institutions and FMIs to digitise global markets,” said R3’s CEO David Rutter. 

Wigley spent a 13 year stint at Merrill Lynch through to 2009, including as Chairman of EMEA. During that period, he was also a Member of the Court at the Bank of England, a non executive director at the LSEG’s LCH Clearnet, and a non executive director at Euroclear. He’s held numerous other board and advisory positions, including Chairman of Victoria Beckham for just over a year. More recently he co-chaired the Cross Market Operational Resilience Group at the Bank of England for a year.

EU tokenization event: DeFi regulation unlikely. Why the DLT Pilot regime is unpopular

Yesterday Renew Europe, the third largest parliamentary group in the European Union (EU), held a joint event with the Global Blockchain Business Council (GBBC) at the EU Parliament. A high quality industry panel explored the potential for tokenization and digital securities.

Two key takeaways related to the DLT Pilot Regime for tokenized securities and the European Commission’s thinking on legislation.

DLT Pilot Regime unsuited to large institutions?

The moderator surprised JP Morgan’s Joshua Daniel by asking why the bank wasn’t participating in the EU’s DLT Pilot Regime, which waves some regulations for digital securities. In a somewhat amusing exchange, Daniel disarmingly requested a different question. Deutsche Börse’s Jens Hachmeister explained that large financial market infrastructures (FMIs) and institutions like JP Morgan have similar challenges with sandboxes.

He metaphorically compared the institutions to aircraft carriers. What if they were asked to adapt to support Cessna aircraft and only for a couple of landings and take-offs? It’s hard for FMIs to justify the cost of getting involved on a small scale and for short periods.

“It’s probably fair to say sandboxes are not geared towards big market infrastructures and big market players,” said Hachmeister.

“Deutsche Börse likes to build infrastructure based on real and sound regulations so that we ensure our investments … pay off”.

This echoes the sentiment of others, such as BNY Mellon that made similar comments in 2022. However, recently Goldman Sachs sounded more positive on the topic. The UK is also launching a Digital Securities Sandbox but has been more vague about limits. Noting the pushback re the DLT Pilot Regime, the UK said it plans to adapt to the scale of the firms involved.

Separate from the DLT Pilot Regime, the European Central Bank (ECB) is running some DLT settlement trials using central bank money based on current regulations. Hence, it only involves institutions that can already access central bank money. Hachmeister added that Deutsche Börse will definitely participate in these trials.

Are DLT and digital securities disruptive?

The Deutsche Börse Clearstream executive also gave an update on the progress of D7, the company’s digital securities post trade platform. So far, it has issued 15,000 securities, including one big bond of around €3 billion. While these are digital, they are issued on a central repository with plans to issue on a decentralized network in the future. Most of the securities are structured products, and our research indicates that about 99% of the issuances are by a single institution, Vontobel Financial Products.

Asked whether DLT is a disruptive technology, Hachmeister defined disruptive as the ability to change how value is created and allocated in an industry.

He compared it to when securities trading went from physical to electronic. Market efficiencies led to significant growth. “Bigger volumes, tighter spreads, more securities issued,” he said. “I believe When we talk about digital securities service infrastructure, it is the next level of the S curve, the next level of market efficiency.”

However, he highlighted that DLT isn’t a panacea. It needs to either earn new revenues or save money. “To me, the question is not whether you use DLT or not. The question is whether you can provide a measurable value add to the client.”

About being disruptive, he said “DLT is one of those technologies,” emphasizing it is not standalone. But he added that “it needs more things to fall into place.”

DeFi regulation unlikely soon?

One of the other speakers was European Commission advisor Peter Kerstens. He discussed the need for the European Commission to publish a report on the MiCA crypto regulation by December. It might express ideas about decentralized finance (DeFi), NFTs, crypto lending and staking.

“The likelihood that it will say something meaningful on decentralized finance is limited because true decentralization escapes regulatory dogma,” said Kerstens. He highlighted that worldwide rules are administered via intermediaries, which are absent in truly decentralized solutions. In fact, he said that DeFi is defined not by technology but by the absence of an intermediary. In many cases, when you scratch below the surface you can find an intermediary, and the best example of a decentralized network is Bitcoin.

“That’s why it’s very hard, if not impossible, to actually regulate it using existing doctrines of regulation. Unless, of course, you are a totalitarian state and you just ban it.” He added, “It’s unlikely that we would have a legal basis in the Treaty to propose a ban if we wanted to.”

Will clearinghouses be disintermediated?

He also responded to a question about whether clearinghouses might be disintermediated. “Clearinghouses are a risk mitigation effort,” said Kerstens. So, if the technology stack develops and the business model develops in such a way that the risks currently caught by clearinghouses are no longer in the system, then you can do away with the clearinghouse. But if that risk is still there, you need a clearinghouse.”

Kerstns also posed the question of what would happen if FMIs didn’t have all the current legacy infrastructure. “If you had to start from a clean slate, I am convinced that DLT would be a much, much bigger part of the technology stack.” 

Deutsche Börse FX arm 360T launches crypto derivatives offering with Wintermute

Today 360T said it launched a trading solution supporting nondeliverable forwards (NDFs) on Bitcoin and Ethereum. The foreign exchange (FX) firm is a subsidiary of the Deutsche Börse and supports the trading of around €30 billion FX daily. The first crypto transaction involved another subsidiary, Crypto Finance as well as Wintermute.

The solution uses existing FX workflows for over the counter (OTC) trading.

Non-deliverable forwards are popular amongst institutions as they provide indirect exposure to the asset without needing to hold or custody cryptocurrency. For example, when Goldman Sachs first got into crypto derivatives, it was with NDFs.

“By launching our crypto offering with non-deliverable derivatives products, we are allowing our diverse, global client base to engage with the crypto market without the need to build or invest in Distributed Ledger Technology (DLT) infrastructure,” said Ralph Achkar, Head of Digital Currency Strategy at 360T. “Looking ahead, we will continue to work with our industry partners to expand 360 T’s crypto offering in line with their needs.” 

The Deutsche Börse has been prolific across both cryptocurrency and digital securities. It bought Crypto Finance for $100m in 2021. Now it’s readying to launch of a regulated cryptocurrency exchange, the Deutsche Börse Digital Exchange (DBDX). It also has a joint venture with Commerzbank, 360x, for tokenized art, music and real estate.

On the traditional side, it backed HQLAᵡ from the early days. HQLAᵡ enables banks to move collateral intraday rather than waiting for two day settlement. Additionally, it launched D7, a tokenization post-trade solution. Initially, D7 issued securities in a centralized depository using smart contracts for the workflow. By early November 2023 it had issued 4,000 securities worth more than €3 billion. It soon plans to start issuing securities on a decentralized network.

And finally, last year it acquired blockchain-based fund distribution platform  FundsDLT.

Stablecoin issuer Circle drops TRON blockchain

Circle, the issuer of the USDC stablecoin, has announced it will no longer mint USDC on the TRON blockchain with immediate effect. However, coins can be redeemed via intermediaries over the next 12 months. Circle’s blog post mentioned compliance, so this is a risk management move. TRON is associated with Justin Sun, who is being sued by the SEC. Circle sold the Poloniex crypto exchange to Sun in 2019.

Last year, Circle said that Mr. Sun and affiliated entities, the TRON Foundation and Huobi Global, do not have Circle accounts. It was rebutting allegations made in a letter to Congressional Representatives from the Campaign for Accountability alleging the use of USDC and TRON in terrorist activities involving Hamas and Hezbollah. The original report on which this allegation was based has been corrected. Of the $93 million mentioned, $160 was USDC.

The balance of USDC on TRON is $311 million, making up just over 1% of the $28 billion USDC market capitalization. In contrast, TRON is the largest platform for the Tether stablecoin. More than $51 billion of Tether is issued on TRON, making up 53% of Tether’s $98 billion market capitalization. According to an analysis by Brevan Howard Digital, TRON accounts for an even larger proportion of Tether payment activity – 61%. 

If you exclude Tether activity on TRON, then USDC is almost twice as active. However, TRON and Tether are widely used in Africa where crypto adoption is significant. In the Chainalysis geographic report, Nigeria is the only African country in the top ten. However, for P2P volumes, African countries make up seven of the top ten most active.

Regarding Circle redeeming the TRON USDC coins, retail users can transfer their holdings to exchanges or another blockchain. Circle will redeem coins for intermediaries and direct corporate customers.

While Circle is regulated by the New York Department of Financial Services (NYDFS), it chose not to become a trust. NYDFS-regulated trusts are limited in the blockchains they can use. So far the NYDFS has only authorized issuances on Ethereum and Solana.

Tokenization firm Xalts acquires Contour trade blockchain

Singapore-based Contour trade finance network backed by nine major banks said it planned to shutter late last year. Now, Xalts a Citi and Accel-backed startup, has announced that it has acquired the blockchain network. While the company didn’t disclose the details, Techcrunch said the consideration was in the high single millions composed of cash and stock.

The Contour big bank backers included BNP Paribas, HSBC, ING and Standard Chartered. Xalts and Contour have a common investor in Citi. “The combination of these two companies into one firm with an expanded vision and a great leadership team will accelerate innovation in global trade finance,” said Everett Leonidas, Director, Citi Ventures.

Since its Series A funding announcement in October 2022, Xalts appears to have pivoted towards infrastructure and providing blockchain and tokenization solutions rather than focusing on digital assets. Apart from trade finance, it also has a loyalty solution and plans for a lending application.

Contour brings credibility

If Contour’s banks and clients stick with it, Xalts will acquire significant credibility. It could call these big banks clients, as well as the corporate partners such as Tata, Rio Tinto and SAIC that have used the platform.

Not only that, but Contour was a relatively mature platform with quite a bit of integration with other solutions.

One of the challenges is how many core staff from Contour are still around, given three months have passed. A fair number still show Contour as their employer on LinkedIn, and CEO Carl Wegner worked on the Xalts deal. However, Josh Kroeker, the former Chief Product Officer who joined from HSBC and participated from the start, has moved on.

Xalts CEO Ashutosh Goel says he wants to “create a Plaid for Trade. Our vision is to expand the scope of Contour’s network which is trusted by banks and corporates, and build it into a rail that enables businesses to access digital solutions for trade and supply chain finance offered by banks, fintechs and technology partners. Combining our platform with Contour’s Network will allow participants to develop and deploy customized solutions quickly.”

HKMA provides guidance to Hong Kong banks on tokenization

Today the Hong Kong Monetary Authority (HKMAwrote to Authorized Institutions (AIs) about their tokenization activities. It mainly focused on non-securities related activities, so it excluded tokenization that would be regulated by the Securities and Futures Commission (SFC). Examples include structured products that are not securities or tokenized commodities. It also issued a guidance note on digital asset custody.

Where there are already regulations covering the conventional form of investment, such as the two examples above, institutions must follow those rules, particularly concerning consumer protection.

Hong Kong also has a law similar to the United States – if tokenization fractionalizes an asset, it might be a collective investment scheme.

Most of the guidance focuses on due diligence, risk disclosures, risk management and custody.

If a bank is offering its clients tokenized products, the HKMA expects them to perform due diligence. That applies to the issuer, tokenization platform provider and product. Has the smart contract been audited? Are there appropriate safeguards for private keys and theft risks? What are the contingency plans for a DLT network failure or cyberattack?

Perhaps most importantly, the banks need to verify the existence of the assets that claim to back the token.

Likewise, the note provides a list of risk areas that must be disclosed to the investor.

The separate guidance on digital asset custody doesn’t purely apply to those providing standalone digital asset custody services. It’s also relevant to custody offered as part of tokenization and cryptocurrency (virtual assets) services.

Meanwhile, the HKMA launched a stablecoin consultation at the end of last year. It covers Hong Kong dollar stablecoins. However, issuers not licensed in Hong Kong can only offer stablecoins to professional investors.

PostFinance, the Swiss post office’s bank, starts offering crypto

Last April Switzerland’s PostFinance partnered with crypto bank Sygnum to launch a retail crypto offering. That solution goes live tomorrow, making it an option for 2.5 million PostFinance customers. The bank is a subsidiary of SwissPost and the fifth largest bank in Switzerland by assets.

PostFinance is the first systemically important bank to offer crypto, according to Sygnum. The other Swiss systemic banks are UBS, Raiffeisen Group and Zürcher Kantonalbank.

Customers can invest as little as $50 and take advantage of crypto custody, trading and savings accounts in 11 cryptocurrencies. We’re guessing that PostFinance decided which tokens to include, given that Sygnum supports almost 30. Users can access the offering 24/7 via the PostFinance online account or app.

PostFinance is not your typical bank. With its link to SwissPost, it is not permitted by law to grant loans directly. While its website might appear to offer consumer loans and mortgages, it is actually a broker. Hence, it is primarily a deposit taking institution (CHF 95 billion in deposits in 2022) but partners with others to offer additional services ranging from retirement solutions to stock trading.

Its 2022 annual report explained the thinking behind its crypto offering. “Through PostFinance’s entry into crypto trading, we are addressing a need among our customers – namely the need for a trustworthy provider for the trading and safeguarding of cryptocurrencies. This is something that we at PostFinance can offer our customers.”

Meanwhile, Sygnum provides B2B crypto solutions for 14 other banks.

Such large scale retail rollouts of crypto solutions are still relatively rare. However, earlier this month Germany’s DZ Bank told Bloomberg that it was working on a retail crypto offering for the 737 German community banks it services.

Shipping carrier MOL trials blockchain carbon insets for biofuels

Japanese shipping carrier Mitsui O.S.K. Lines (MOL) is involved in a blockchain pilot for carbon insets. It’s tokenizing the CO2 reductions from using biofuels rather than conventional marine fuels. One advantage of the insets is that the shipping line can recover some of the costs of the more expensive fuel. It does so by passing on some of the inset benefits to freight forwarders and clients shipping goods.

It’s common to hear about tokenized carbon credits in the blockchain world, but that involves offsets rather than insets. One party does the ‘clean’ activity and sells the carbon credit to a company that wants to offset its pollution. The buyer is not performing a clean activity, and the carbon savings are not directly related to its processes. 

In contrast with carbon insets, the buyer incorporates the clean activity into its processes, such as ensuring the logistics process is relatively sustainable.

For this use case, blockchain doesn’t just tokenize the benefit. It also provides transparency. That would allow a goods manufacturer to include the details in a product passport.

“To achieve our global climate goals, we need more low carbon fuels and bio-methanol is one of the very promising solutions for the shipping industry,” said Jeroen van Heiningen, Managing Director of 123Carbon, which provided the blockchain solution. Methanex was the partner for the biofuel, Verifavia was the third-party assurance partner, and AllChiefs implemented the solution.

Book and claim for insets

The insets are allocated along the supply chain using a ‘book and claim’ methodology. That means the goods shipped don’t necessarily travel on a ship that uses biofuel. Instead, buying the insets contributes to the industry’s use of more marine fuel. In other words, it’s paying as if its goods traveled on a ship that used biofuel, even if that specific ship did not.

In the aviation sector, the Sustainable Aviation Fuel (SAF) movement also uses the book and claim methodology. If an executive is making a business trip, finding a flight using SAF is too complicated. Instead, the traveler’s employer purchases inset when the flight is booked.

Meanwhile, 123Carbon is also working with another shipping carrier, Denmark’s Norden.

Japan progresses law for VCs to invest in web3 crypto tokens

On Friday Japan’s Cabinet approved a Bill, the Industrial Competitiveness Enhancement Act. Assuming the legislation passes, one of the clauses will allow limited liability partnerships (LLPs) to invest in crypto asset tokens. Most venture capital (VC) firms are LLPs. 

Last year we reported that the plans were in progress. At the time, there was a discussion about dropping the requirement for LLPs to invest half their assets domestically. We don’t believe that is part of the bill.

The fact that VCs have been prevented from investing directly in tokens may have discouraged some VCs from investing in web3. However, those focusing on the sector will have found workarounds. It may have encouraged some to push their investments outside of Japan. For example, SBI set up a fund in Singapore, and Nomura’s digital asset arm Laser Digital is based in Switzerland. 

Last year Japan’s biggest bank, MUFG, was exploring the creation of crypto trusts, allowing VCs to invest indirectly in crypto tokens via trusts. 

Japan is amongst the more advanced economies when it comes to blockchain and web3. The news is timely as the Financial Services Agency (FSA) is launching the inaugural Japan Fintech Week in early March.

Compared to most jurisdictions, Japan has a larger volume of real world asset (RWA) tokenization, especially in real estate. Some of it targets retail investors.

It also has one of the more advanced legal frameworks for stablecoins, allowing multiple different types. These include trust-based stablecoins and bank deposit tokens. Both Circle and Binance have announced initiatives in Japan. Additionally, Japan’s NFT sector didn’t suffer quite as big a lull compared to the West.

ECB argues EU CBDC won’t disintermediate banks

In an opinion article, three senior European Central Bank (ECB) executives, including board member Piero Cipollone, made the case that a retail central bank digital currency (CBDC) won’t have the negative impact on banks that many predict. They were writing in VoxEU, the Centre for Economic Policy Research (CEPR) publication.

As context, various banking associations have argued that the launch of a digital euro could see deposits migrate to the CBDC. A recent report commissioned by the European Banking Federation stated that a digital euro would result in deposit flight, leading to a permanent reduction in EU GDP. One of the German banking associations, BVR, argued for lowering the proposed CBDC holding limit from €3,000 to €500.

As we reported last week, the latest iteration of the draft digital euro legislation allows banks to set the limits themselves.

Digital euro design reduces the risk of deposit flight

In the CEPR article, the ECB executives state that deposits are unlikely to migrate away because of the digital euro design. This combines a holding limit with the reverse waterfall, which allows instant top-up of a CBDC wallet using a bank account. In other words, consumers don’t need to pre-fund their CBDC payments, provided they have money in their bank accounts. In addition to this combination of factors, merchants and other businesses can transact with the CBDC but cannot hold any digital euro balances, protecting corporate bank deposits.

They review scenarios such as a single bank run or a broader banking crisis and highlight that deposit holders can already transfer money to other banks or withdraw unlimited amounts of cash. They also noted that much analysis fails to recognize that physical cash holdings will drop over time and have started to do so. Although they acknowledge that the €5 billion 2023 decline was likely interest rate related.

Other bank threats

Instead of the threat of a CBDC, they argue banks face other threats, including stablecoins.

They conclude, ‘Banks have to offer attractive products and services to incentivise customers to hold their deposits at banks rather than migrate to new and powerful private competitors. And the digital euro is also a unique opportunity for banks, as it will allow them to launch new and innovative products, address new use cases, and extend their scope beyond domestic markets.’

Circling back to the updated draft of the digital euro legislation, it has a number of favorable changes for banks. These include:

  • moving holding limit decisions to the payment service providers
  • the market will decide inter-PSP fees
  • recognition of the need to cover implementation costs in those fees
  • enshrining the use of an ECB wallet as strictly optional.

As an aside point, the VoxEU paper describes the idea of a synthetic CBDC – where a stablecoin is backed by central bank deposits – as ‘absurd.’ This likely refers to the retail context like the rest of the paper. Bank-backed Fnality has launched a wholesale synthetic CBDC in the UK and has plans to do so in the EU and US.

Meanwhile, an EU Parliamentary committee held a first vote on the digital euro legislation report last week. It was overwhelmingly in favor. Given the parliamentary parties supporting the law, the passage of digital euro legislation looks likely.

SAB 121: ABA, SIFMA ask SEC to exclude digital securities from custody requirements

Almost two years ago, the Securities and Exchange Commission (SEC) introduced Staff Accounting Bulletin (SAB 121) relating to digital asset custody. It requires assets to appear on the custodian’s balance sheet, a very unorthodox accounting treatment. Now major banking and securities industry bodies – ABA, SIFMA, BPI and FSF * – have written a letter to the SEC. They’re asking for amendments to the bulletin’s requirements.

They request that the rule not cover all crypto-assets and ask for it to exclude use cases that combine DLT and traditional assets. In other words, they want digital securities excluded, even if cryptocurrencies stay in.

SAB 121 will have a chilling effect on banking organizations’ ability to develop responsible use cases for distributed ledger technology (DLT) more broadly,” the letter states.

That’s because bank capital requirements are based on the balance sheet. The more assets, the more capital has to be set aside.

Secondly, they request that the balance sheet requirement is removed for banks. They’re happy to disclose the amounts of crypto-assets held in custody as a note.

The letter also states, “Digital asset custodial services are currently offered by various non-banking organizations, thereby keeping activity outside the prudential perimeter and avoiding the necessary oversight by regulators.” 

One of the SEC’s primary missions is to protect consumers, but SAB 121 has the opposite effect with Bitcoin ETFs. The letter highlights that SAB 121 prevented regulated banks from providing Bitcoin custody for the recent Bitcoin ETF launches. The two largest ETFs from BlackRock iShares and Fidelity now have a combined $8.3 billion assets under management. Coinbase provides custody for most of the ETFs (not Fidelity’s), creating a concentration risk.

Congress opposition to SAB 121

Meanwhile, the Government Accountability Office (GAO) ruled in November that Congress should have reviewed SAB 121. Last week there was meant to be a vote on a Congressional resolution to cancel SAB 121. We don’t believe that vote happened, but we have contacted legislators to confirm.

* The associations are the Bank Policy Institute (BPI), American Bankers Association (ABA), Financial Services Forum (FSF) and the Securities Industry and Financial Markets Association (SIFMA).

EU Parliamentary Committee votes in favor of digital euro

Yesterday the parliamentary European Committee on Civil Liberties and Justice (LIBE) voted in favor of the latest digital euro report. It proposes amendments to the draft legislation that would make the digital currency legal tender. An overwhelming majority voted in favor (48), with just six votes opposing the central bank digital currency (CBDC). There were seven abstentions.

As reported earlier this week, the proposed amendments to the draft digital euro legislation include support for permissionless blockchains and address most of the demands of banks.

Yesterday’s vote was along party lines, with liberal and left-leaning parties voting in favor. The center-right PPE party, the largest group of MEPs, joined them.

Hence, if one extrapolates to a broader parliamentary vote, it will likely support a digital euro. The parties that voted in favor were the PPE, S&D, Renew, Greens and The Left. In total they control 531 of the 705 parliamentary seats. 

The overwhelming support is a turnaround from last year’s first parliamentary debates, which highlighted many reservations.

Conservative pushback

Unsurprisingly, some conservative MEPs were not happy. MEP Cristian Terheș of the ECR group was one of them.

“Cash is a form of property, over which the person disposes as he wishes, without the state being able to control, supervise or approve the commercial exchange between the buyer and the seller,” he said.

“In the case of digital money, however, in order to receive, hold and transact it, the person needs digital instruments of the state, as in the case of the Digital Wallet, so that the state is in full control of the transaction between the buyer and the seller.”

However, the latest iteration of the draft legislation states that payment providers can use their own wallets. However, the European Central Bank will prescribe digital euro standards.

MEP Terheș continued, “Regardless of the pretext that it is the prevention of money laundering or tax evasion, the implementation of the digital currency will lead to the total control of the state over the population. All the more serious is the fact that all the vices leading to the violation of citizens’ rights could be corrected in the LIBE Committee, which was not done.”

Ledger Insights will soon publish a report on bank-issued stablecoins and tokenized deposits. Sign up for notification of its release.

US sanctions developer of Iran’s CBDC

On Wednesday the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed sanctions on Informatics Services Corporation (ISC). The company is a subsidiary of the Central Bank of Iran and developed its central bank digital currency (CBDC) and other payment systems.

In addition to the ISC, two firms in Dubai and one in Turkey are also sanctioned for procuring technology on behalf of ISC. The UAE based entities are Advance Banking Solution Trading and Freedom Star General TradingOFAC says ISC procured information security items subject to national security and anti-terrorism controls.

“The Central Bank of Iran has played a critical role in providing financial support to the IRGC-QF (Revolutionary Guard-Qods Force) and Hizballah, two key actors intent on further destabilizing the Middle East,” said Brian E. Nelson, Under Secretary of the Treasury for Terrorism and Financial Intelligence.

CBDC is one of the tools that Iran plans to use to circumvent U.S. sanctions. The country joined the BRICS intergovernmental organization this year. One of its first moves was to encourage cooperation around payment systems, digital currencies and common currencies.

At the same meeting, Russia emphasized the conclusion from the previous BRICS meeting to promote the use of local currencies rather than the U.S. dollar. 

Last January, there were Russian reports that Iran and Russia might use a gold-backed currency to trade with each other. At the time, we noted that Russia’s regulation on Digital Financial Assets (tokenized real world assets) prohibited using DFAs for payments. However, in April Russia published a draft law to allow DFAs to be used for cross border payments.

Meanwhile, Iran started piloting its CBDC in 2022. It reportedly uses Hyperledger Fabric.

IMF outlines its Digital Asset Platform model

An observation in the IMF’s recent Digital Asset Platforms paper is that conventional finance tends to tightly combine assets with the platform on which they exist. For example, a bank’s money is only usable on its own banking platform. In contrast, with digital assets, the asset could exist on multiple platforms. Consider a stablecoin issued on multiple blockchains.*

Interoperability is widely recognized as a topic that sorely needs addressing for digital assets. The internet protocol TCP/IP is credited with enabling internet interoperability. The IMF authors ask, “What is the TCP/IP equivalent for digital assets?” They borrow another concept from the internet era, the OSI model, which separates networks into layers.

For digital assets the authors define four layers that make up a Digital Asset Platform (DAP), the ASAP model. The layers are 

  • the Platform (eg. a blockchain)
  • the Asset (eg. a CBDC or bond)
  • the Service (eg. a lending protocol) and 
  • the Access (eg. a website, wallet).

The authors highlight that the asset and service layers are understudied. They have a lot of potential to address the issues of interoperability of systems, governability and risk. 

Why the focus on asset and service layers?

On the one hand, the Platform layer is highly competitive and evolving, there are lots of blockchains and distributed ledger technologies (DLTs). Platform ecosystems and software vendors aren’t incentivized to engage in standardization at the base layer and it’s complex to do so. 

On this point, we’d observe the proliferating number of base networks. Numerous banks have launched their own digital asset platforms underpinned by separate blockchain networks. Plus, there are several large scale initiatives such as the Unified Ledger and Regulatory Liability Network.

At the other end of the spectrum, the Access layer has attracted a lot of attention, particularly from Payment Service Providers. There is an element of standardization such as QR code formats. Plus, the Access layer can build on the standards developed at the asset and service layers, such as the Ethereum token format ERC20.

Talking about the Asset and service layers, the authors state:

These two layers offer an avenue where the financial sector can harness its potential for coordination to attain interoperability. Just like the ERC20 standard allowed unprecedented composability of assets and services on the platforms that support it, a standardization effort in these layers may bring efficiency in channeling the resources of the financial sector in this regard and effectiveness in delivering the important externalities brought by the interoperability.

A specific example highlighted in the paper is the Monetary Authority of Singapore’s concept of Purpose Bound Money (PBM). Central banks are wary of programmable money, but PBM allows a company to build on top of an asset, for example by creating vouchers. It adds a wrapper to the asset – a CBDC, deposit token or stablecoin – and then adds PBM logic at the service layer.

Next steps

This is the first in a series of IMF papers, with the next one focusing on developing a model for the Asset layer. The aim is to use this work to address interoperability and risks.

The paper doesn’t give the example of conventional stocks, perhaps because you can have depository receipts enabling trading on another platform. That’s not a million miles away from locking and wrapping tokens on a different blockchain. However, depository receipts require a trusted intermediary. The point about separating the platform and asset layers is still entirely valid.

Fed’s Powell confirms U.S. stablecoin legislation is ‘close’

On Tuesday, Federal Reserve Chair Jerome Powell met behind closed doors with Democrats on the House Financial Services Committee, Politico reported. A week ago Committee ranking Democrat Maxine Waters said that bipartisan agreement on stablecoin legislation was close, also according to Politico. 

“We need a framework for stablecoins,” Powell said, according to a source at Tuesday’s meeting. Powell added that he is “very supportive and am glad that we are close.” 

Just over six months ago, Republicans voted a draft stablecoin Bill through the same Committee, with strong opposition from Democrats. The vote came after one of the more acrimonious Committee sessions, which didn’t bode well for a full House or Senate vote.

The Fed Chair also touched on central bank digital currency (CBDC). “If we’re going to have a CBDC, Congress needs to authorize it,” according to the source. “We aren’t advocates, but we haven’t made a decision to recommend a CBDC to Congress.”

A CBDC Bill could struggle to get passed by Congress. The key points any legislation would need to address are the impact on bank lending and privacy. Republicans have demonstrated strong opposition to a CBDC on the grounds of privacy. Most Democrats are supportive, except for a handful that fear a reduction in bank deposits could impact bank lending.

Meanwhile, Republicans have been promoting state-level anti-CBDC Bills in an attempt to obstruct a CBDC should it be launched. Three states have passed legislation. At the start of the month, 11 states had pending Bills. Two weeks later, that figure is now 13.

Telefonica partners web3 oracle Chainlink for SIM Swap detection

Today Telefónica announced an alliance with Chainlink Labs to enable smart contracts to access data from a SIM swap API. Fraudsters often use SIM swapping to get hold of one time passwords to hack accounts. The SEC notoriously lost control over its X account through a SIM Swap and the hackers posted the Bitcoin ETF approval news a day early.

The telecoms association GSMA has developed several GSMA Open Gateway APIs, including one for SIM swaps. Accessing this API could enable smart contracts to avoid potential financial fraud by checking if the SIM was recently swapped. Vivo (Telefónica Brazil) is the first carrier in the group to use the integration, enabling smart contracts on the Polygon blockchain to access the SIM SWAP API via the Chainlink oracle network.

“Bringing Telefónica’s OpenGateway APIs onchain with Chainlink Functions unlocks novel use cases and greater security for our industry that ultimately better protect users and their assets,” said Johann Eid, Chief Business Officer, Chainlink Labs.

The challenge with smart contracts accessing external data such as this is that it makes an attractive target to hack. Hence, Chainlink operates a decentralized oracle network (DON) to spread the load, and the nodes come to a consensus about the data provided.

Yaiza Rubio, Chief Metaverse Officer at Telefónica, said this is “the first use case of the GSMA Open Gateway SIM Swap API, which positions us as a Web3 enabler and will allow us to accompany developers towards the web of the future.”

Vivo is using a new Chainlink feature, which is still in beta testing mode, Chainlink Functions. It enables smart contract requests to use secret values, such as API keys, and uses multi-party decryption.

How it works

For example, if a smart contract wants to access an API, it might need an API key that can’t be stored on the chain. Using Chainlink Functions, the off-chain application running the smart contract converts the API key to a set of encrypted secrets. These are sent to the nodes on the off-chain decentralized oracle network (DON). This secret data can only be decrypted through coordination amongst the DON nodes and the nodes can then access the API.

Meanwhile, Chainlink has increasingly been targeting real world applications and mainstream institutions. It recently collaborated with another telco, Vodafone and Sumitomo for a trade solution involving electronic bills of lading. Plus it collaborated with Swift and several traditional financial institutions (TradFi) for a blockchain interoperability.

Citi trials fund tokenization on Avalanche blockchain

Today Citi announced its latest blockchain proof of concept involving the tokenization of a private fund within the Avalanche blockchain ecosystem. The tokenized fund was one of Wellington Management’s private equity funds, and the test also involved WisdomTree and ABN Amro.

Citi isn’t the first institution to spot the potential for private fund tokenization. It’s a $10 trillion asset class where processes are more manual and less standardized. 

In this case, smart contracts encoded the fund distribution rules. Other features trialed included identity credentials and using the fund token as collateral for an automated lending contract with DTCC Digital Assets (formerly Securrency).

“Smart contracts and blockchain technology can enable enhanced rule-enforcement at an infrastructure-level, allowing data and workflows to travel with the asset,” said Nisha Surendran, Emerging Solutions Lead for Citi Digital Assets. “We believe that by testing the tokenization of private assets, we are exploring the feasibility to open-up new operating models and create efficiencies for the broader market.” 

ABN Amro played the role of a traditional investor requesting the tokenization. The tokens were transferred to hypothetical WisdomTree clients.

The proof of concept was executed on the Avalanche Spruce testnet, a permissioned subnet with institutional validators. Wellington, T.Rowe Price, WisdomTree and Cumberland first started using the Spruce testnet early last year. Tokenization firm Tokeny was involved in helping with identity and as the developer of the ERC-3543 tokenization standard.

It’s also not Citi’s first experience on Avalanche. Last year Citi trialed an FX solution with T.Rowe Price and Fidelity International. It was part of Singapore’s Project Guardian tokenization trials.

Draft digital euro legislation supports permissionless blockchains

Today the EU’s Committee on Economic and Monetary Affairs had a meeting during which the digital euro was discussed. An updated draft of the digital euro legislation reveals several key changes. They include support for permissionless blockchains.

The draft legislation states, “Conditional payments in Digital Euros may also be carried out on permissionless distributed ledgers where until now only privately issued assets like crypto-assets or stable coins are available as a means of payment. With the approval and under conditions set by the European Central Bank, the Digital Euro would be made available as a token to be referenced on these chains.”

The central bank and European Council have previously stated they don’t want programmable money at the base layer, so the legislation now specifies conditional payments will be enabled in the “layer above”.

Major changes on holding limits, fees

Banks had a number of objections to the digital euro and most have been addressed. There were concerns about a possible €3,000 holding limit being too high and resulting in a drain on bank deposits. They argued for a €500 limit. The latest draft transfers decision-making responsibility for the holding limits from the European Central Bank to the banks and payment service providers (PSPs) themselves. It suggests they might want to set the limit as the equivalent cash amount clients can withdraw via a debit or credit card, but it doesn’t prescribe it.

On the face of it, this is a big win for the banks. However, this also applies to non-bank payment providers. Given the non-banks aren’t deposit takers, they aren’t worried about losing deposits. So, they could offer very high holding limits, potentially putting banks at a competitive disadvantage.

There are also concessions on fees. A CBDC is not dissimilar to debit and credit cards in that you have merchants and consumers and money has to be moved between them. Hence, there’s a need for inter-PSP charges. The legislation previously prescribed how this might be set: cost plus a reasonable profit margin. Now the inter-PSP fees will be decided by the market. 

Banks were also concerned about potentially not being able to recoup digital euro costs. The legislation acknowledges their need to cover implementation costs.

The ECB wallet is optional

Another concern was that the ECB’s wallet user interface would have to be used rather than their own wallets. The ECB has already stated that is not the case, and the legislation clarifies that the ECB wallet needs to be used only by payment providers that don’t have their own.

In the previous draft legislation, banks were required to provide digital euro services, but it was optional for other payment service providers. Now the requirement also applies to most PSPs.

Meanwhile, European Central Bank (ECB) board member Piero Cipollone provided an update to the Committee.

More to follow.

Deutsche Telekom joins Bosch at blockchain foundation

Last year German industrial company Bosch and Fetch.AI formed the Fetch.AI Foundation. The web3 startup has a concept of Autonomous Economic Agents (AEA), which are sensor-driven devices that are both self-learning and capable of automatically transacting. Now Deutsche Telekom MMS has joined the foundation as its first corporate member. The telecoms firm also becomes a validator on the blockchain network. autonomous agents are being used in the Economy of Things, which combines web3, IoT and smart devices for industrial applications. Use cases include healthcare, automotive, supply chain management and digital identities. One mobility example is an autonomous car deciding on the best parking space.

“The collaboration between Deutsche Telekom, and Bosch is groundbreaking and combines industrial applications with the Internet of Things,” said Dirk Röder, Head of the Web3 Infrastructure & Solutions Team at Deutsche Telekom MMS. “Autonomous agents will automate industrial services, simplify processes and make them secure and scalable thanks to blockchain technology.”  

Since 2019 Deutsche Telekom has been a node operator, validator and staking provider for numerous public blockchains. Its first initiative was to join the governing council of the Hedera Hashgraph DLT in 2019. Since then it has operated nodes on Chainlink, FlowCeloEthereum, Q network, Polygon and the Graph.

Why NZ central bank quip about people trusting printed money is dangerous

During a parliamentary committee hearing, Adrian Orr, Governor of the Reserve Bank of New Zealand made a joke. 

“It’s a great business to be in central banking. You print money and people believe it. Touch wood,” said Orr. The Committee laughed.

During the hearing he also touched on cryptocurrency and stablecoins. As a result, the hearing attracted more attention than usual.

The Bitcoin community has jumped on the statement, interpreting it as central banks viewing citizens as fools. However, that has always been a driver for hardcore Bitcoin fans, so that is not such a big deal.

The joke is both amusing and dangerous because of an element of truth. It’s about trust. And also respect. If you lose that trust or give the perception of a lack of respect, the foundations can crumble quickly.

The Gerald Ratner parallel

In the 1980s a famous UK entrepreneur, Gerald Ratner, built the world’s largest jewelry retailer, Ratners.

It had 1,500 stores in the UK and another 1,000 in the United States. Ratners was making profits of £125 million a year but was rather down market, specializing in cheap jewelry. Everyone knew that.

And then, in 1991, Ratner made a joke.

At a business conference, he described some sherry decanters sold by Ratners as “total crap”. He followed it up by referring to a set of earrings as “cheaper than a prawn sandwich from Marks and Spencer’s, but I have to say the sandwich will probably last longer than the earrings.”

People didn’t buy low-priced jewelry from Ratners expecting it to last. His joke had an element of truth to it. However, it also implied a lack of respect for his customers.

Within six months Ratner’s stock price went from £4.50 to a few pennies. And founder Gerald Ratner was out and broke.

The lesson is not everyone has a sense of humor. And be careful if your joke is viewed as an insult. What is a central bank without credibility?

There’s one important difference between Ratners and a central bank. Ratners had more competition. That said, there are cryptocurrencies and stablecoins. And foreign fiat currencies.

On the topic of crypto and stablecoins, below is an excerpt of a related question and answer during the hearing.

Cryptocurrencies and stablecoins

Question from Member of Parliament Stuart Smith: 

“Are central banks around the world at all worried about independent digital currencies versus central bank fiat currencies? And the potential to move away from the US dollar which runs all the major commodities which are priced in US dollars. What sort of impact that would have on the international financial system.”

Governor Orr answered the crypto element:

“The answer is yes, critically concerned. Mostly in that what is advertised on the tin is not in the tin for these purported alternatives to central bank cash. There’s concepts such as Bitcoin. It’s neither a means of exchange, it’s not a store of value and it’s not a unit of account. Yet people try to use it as that. It’s got other purposes but it’s not at all a substitute for, nor even a complement to, central bank money, fiat currency.”

“Likewise, stablecoins are the biggest misnomers such as a hedge fund. Oxymorons. Stablecoins are not stable. They’re only as good as the balance sheet of the person offering that stablecoin. And only as good as that person’s willingness through time to see that stablecoin (as) good. Fiat currencies such as the New Zealand dollar, because it’s got the legislation, power of parliament, (and) ability to tax. And through time, intergenerationally, there is the balance sheet support behind it. And a credible institution such as an independent central bank to maintain low and stable inflation.”

“Those other coins – the offer forms of supposed alternatives to cash- are not. And that is the big regulatory push.”

“The UK is going very hard at the moment on all sorts of laws and regulations. It’s very difficult.”

“The number one thing we can do is be as transparent and blunt as we can. A speculative coin is not a currency. It is not central bank cash.”

Professor Neil Quigley, the central bank’s Board Chair, fielded the US dollar aspect:

“There are peculiar features of the US regime which allow it (the dollar) to be the international reserve currency. Availability, the credibility of the American monetary authorities. That could change over time. But those things tend to change only slowly. And in the 20th century we just had really the transition from sterling to the US dollar. So we don’t expect rapid changes in those sorts of things.”

White House tech policy unit deems DLT, digital assets vital for national security

Yesterday the White House Office of Science and Technology Policy (OSTP) published a paper outlining critical and emerging technologies (CET). These are considered important for national security. DLT, digital assets and digital identity made it onto the list.

“It will also be a useful resource as we continue to engage allies and partners to ensure that CETs yield tangible benefits for society and are aligned with our democratic values,” said OSTP Deputy Director for National Security Stephen Welby.

While artificial intelligence (AI) unsurprisingly made it into the top 18 categories, digital assets and DLT were buried under “Data Privacy, Data Security, and Cybersecurity Technologies”. That category also includes digital payment technologies and digital identity.

The last time the OSTP published the list was two years ago. On that occasion, those four items were classified as ‘financial technologies’.

“In the next decade, critical and emerging technologies are poised to retool economies, transform militaries, and reshape the world,” said a White House statement. “The United States is committed to a future where these technologies increase the security, prosperity, and values of the American people and like-minded democracies.”

A different arm of the White House, the Council of Economic Advisers, is not so keen on the technologies. Last year, as Part of the President’s Economics report, it was critical of blockchain technology, not just cryptocurrency. For example, they wrote, “many prominent technologists have noted that distributed ledgers are either not particularly novel or useful.”

Meanwhile, the OSTP has previously leaned into these topics. In 2022 it clarified the design options for a digital dollar central bank digital currency (CBDC). As we previously noted, a U.S. retail CBDC faces an uphill battle for Congressional approval. Pretty much all Republicans opposed it and a few Democrats fear its impact on bank lending. 

Ripple to add U.S. trust charter with acquisition of Standard Custody

Today Ripple announced it agreed to acquire Standard Custody & Trust Company, which holds a New York Limited Purpose Trust Charter. It holds one of just nine New York licensed crypto trust charters. Other NY trusts include well-known firms such as Coinbase, Fidelity Digital Assets and Paxos. Ripple didn’t announce the terms of the deal.

Last year Ripple acquired digital asset custody firm Metaco for $250 millionMetaco has a raft of big name banks as clients. They include BNP Paribas Securities Services, Societe Generale Forge, HSBC and Standard Chartered’s Zodia Custody.

Standard Custody is no stranger to Ripple. The architects of Standard Custody’s technology are Arthur Britto and David Schwartz, who both co-created the XRP Ledger. Schwartz is Ripple’s current Chief Technology Officer, and Britto was the founder of PolySign, the parent of Standard Custody and a co-founder of Ripple.

In 2022 PolySign raised $53 million in Series C funding, which included Cowen Digital and Brevan Howard as backers. Last year TD Cowen shuttered Cowen Digital, but it advised Standard Custody on this transaction. 

“Ripple and Standard Custody are dedicated to enabling enterprises to reap the benefits of blockchain across a host of financial use cases building institutional-grade solutions to tokenize, store, move, and exchange value,” said Monica Long, Ripple President. “By expanding our licenses portfolio and making smart acquisitions, Ripple is well-positioned to take advantage of the current market opportunities and further strengthen our crypto infrastructure solutions.”

The transaction is subject to regulatory approval. Ripple already owns 40 money transmitter licenses in the United States.

JP Morgan pitches deposit tokens for ECB DLT central bank money trials

The Eurosystem is gearing up for wholesale settlement trials for DLT networks using central bank money. It opened the call for applications in December, with tests to start in earnest in May. Last month it held its sixth meeting of the industry contact group. As with most previous sessions, various companies outlined potential use cases. One of them was Onyx by JP Morgan.

This sixth contact group meeting will be the last until June, which will be an in-person meeting, presumably to get feedback about the trials. 

When the DLT initiative first launched, the emphasis was on securities settlement. As tokenized deposits and deposit tokens have moved up the agenda, there are likely to be multiple use cases where central bank money (CeBM) will be used to settle interbank payments. In the most recent contract group meeting, two groups proposed this use case – the ABI Lab which is part of the Italian Banking Association and Onyx by JP Morgan.

With stablecoins or central bank digital currencies (CBDC), when a payer sends the tokens to a recipient, that’s the end of the story. However, with tokenized deposits, that’s only half of the transaction. Additionally, The sender’s bank has to pay the recipient bank. That can be done conventionally via a real time gross settlement (RTGS) system, or it can use a wholesale CBDC. Hence, there is a need for central bank money (CeBM).

These Eurosystem trials are not in a sandbox environment. They will involve using real money settled in the T2 RTGS system. As a result, participants are limited to regulated entities, as described previously.

Onyx by JP Morgan use cases

JP Morgan proposed two use cases. The first one describes a simple customer payment involving a deposit token. When the recipient (who uses a different bank) converts the token back into a conventional bank balance, the banks must settle up. Central bank money is used for interbank settlement.

A second use case involves an interbank foreign exchange transaction. One leg of the transaction uses a deposit token, and the other uses central bank money.

Italy’s ABI Lab and DLT

Ledger Insights will soon publish a report on bank-issued stablecoins and tokenized deposits. Sign up for notification of its release.

Italy’s Spunta Banca DLT has been in production for several years already. Most of Italy’s banks automate their interbank settlement using DLT. One of the key drivers was the reduction in operational risk. After launching in 2020, so far its DLT infrastructure has processed 750 million transactions.

Now the ABI Lab wants to take it a step further with Project Leonidas. Once interbank reconciliations are complete, the banks are required to settle up. And they want to do that using central bank money. However, at this stage, the plan with the Eurosystem is to do simulations rather than use real money. The ABI Lab has already run similar trials in a Bank of Italy sandbox.

Apart from the two interbank settlement solutions, asset managers also had their say. AXA Investment Managers and Union Investment, two of the more prolific asset managers in the tokenization space, outlined their views on the benefits of using CeBM for settlement, particularly for bonds. They believe CeBM will cut transaction costs, reduce credit risk, and increase the efficiency of payment and settlement. That’s in part because there are fewer manual reconciliation processes.

Experimental CeBM solutions

As previously outlined, there will be three solutions involved in the experiments. One is Germany’s Trigger payment solution that will trigger payments on the T2 RTGS. Another is Italy’s TIPS Hashlink solution and a third is France’s wholesale CBDC. The latter two will require funds to be escrowed via the national central bank before credit is given on the central bank money platform. Unused escrowed balances should be returned at the end of the day.

However, if the Eurosystem decides to proceed with any of the solutions, they will also have different treatments. The Trigger solution will use normal central bank reserves. But the other two would each require separate central bank reserve pots. So, from a fragmentation perspective, as currently designed, that puts them at a disadvantage.

Previous NTW-CG meetings: 123, 4

ODX’s START, Japan’s market for security tokens to expand beyond real estate

Last Christmas day, the Osaka Digital Exchange (ODX) launched the START secondary market for tokenized securities. Founded by SBI, backers include Daiwa Securities, Nomura, SMBC and the CBOE. Japan has a reasonable amount of institutional tokenization activity, mainly around real estate. START plans to support security tokens for other asset classes, including aircraft, ships and renewable energy assets.

Trading has been muted as might be expected for a novel marketplace, and only two digital securities were available at launch. During the first month there were 110 transactions for a total of JPY 11 million ($73,600).

The securities firms involved with the first tokens were SBI Securities and Daiwa Securities. Nomura Securities and SMBC Nikko Securities are expected to join the platform this year. Others have also approached the trading platform.

Additionally, ODX launched the START Operations Committee, which includes members from token issuers, trust banks, blockchain platforms (such as BOOSTRY and Progmat) and securities firms.

While there are a handful of digital securities secondary markets worldwide, most were created by startups rather than incumbents, as is the case here. Examples of secondary marketplaces include SecuritizeADDXFigureINX, and tZERO. Amongst incumbents, SIX launched the SIX Digital Exchange (SDX) in Switzerland.