NEW YORK: Wall Street’s embrace of blockchain technology is moving beyond merely creating digital versions of stocks, bonds and money-market funds toward a bigger goal: changing how those assets move through the financial system.
BlackRock Inc, which helped bring cryptocurrencies into mainstream investment portfolios while putting traditional funds on blockchains, sees opportunities for tokenised assets to serve as collateral, move between investors around the clock and reduce the need to redeem holdings when transferring ownership.
Some of that is already happening.
BlackRock’s tokenised funds are being used as collateral in the digital-asset market, according to Dan Maley, who oversees its cash business in Asia Pacific.
Extending that use to traditional finance, though, is proving more complicated.
It requires banks and other institutions to accept the instruments as collateral, existing market infrastructure to accommodate them and regulations to provide sufficient certainty.
And while fund tokens can change hands around the clock, that doesn’t necessarily mean investors can redeem them for cash at any hour.
“The larger unlock becomes then when you can utilise that for the traditional financial ecosystem,” Maley said in an interview.
Conventional money-market funds already serve as collateral for trading positions, including initial and variation margin. Tokenisation could make it easier to move those holdings without first redeeming them, potentially allowing institutions to keep assets invested for longer.
But the hurdles go beyond technology.
The International Monetary Fund has stated that tokenised finance still faces a variety of problems including fragmented platforms, legal uncertainty and difficulties connecting with existing financial infrastructure.
Similarly, the International Swaps and Derivatives Association argues that a number of operational hurdles still hold up the crossover into traditional finance.
“Questions relating to custody and segregation frameworks, capital and margin treatment, cross-border recognition and legal certainty must be addressed with industry standards and regulatory clarity,” said Scott O’Malia, chief executive officer or CEO at Isda.
Isda is the global derivatives industry body that sets widely used legal standards and documentation for derivatives trading and collateral.
Those issues help explain why tokenised assets can already move efficiently on blockchain but are not yet widely used across traditional collateral and settlement systems.
For BlackRock, the key distinction is that tokenisation doesn’t change what a money-market fund owns – it changes the rails on which ownership can move.
Shares represented as tokens can be transferred between approved investors, potentially allowing an institution to shift an asset without first redeeming it for cash.
The earliest users have largely come from crypto.
Nikhil Sharma, director on BlackRock’s digital-assets team, said many were investors holding stablecoins on-chain and looking for a way to earn yield.
“The extension into collateral was also from that cohort,” Sharma said.
BlackRock is expanding that model.
Its first tokenised money-market fund BUIDL has grown to about US$2.3bil since its 2024 launch, making it one of the largest products of its kind. — Bloomberg
