Wall Street’s token crypto gesture

Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. Scott’s away this week so you’ve got me, and I’m taking a look at the promise and progress of tokenisation.

Ask people in traditional finance about what they’re doing in crypto, and the chances are you’ll hear them enthusiastically reply: “Tokenisation is really interesting!”

Hunt away from the headlines and you’ll find plenty of Wall Street’s biggest names exploring this idea. This week Citi became the latest large institution to take a step into tokenisation by allowing big-money clients to turn their deposits into tokens.

Asset managers from BlackRock to Abrdn, and investment banks including JPMorgan and Morgan Stanley are also either investing in tokenisation companies, or themselves exploring how to turn traditional assets such as bonds and funds, into digital versions. Even BlackRock chief executive Larry Fink, a contender for the title “King of Wall Street”, has said that securities tokenisation will herald the “next generation” for markets.

So what is it? For the uninitiated: at its simplest, tokenisation is when a digital asset or “token” represents the ownership and other information about a traditional asset, such as a bond or fund. The tokens live on a distributed ledger and can hold lots of digital information, such as the asset’s ownership history, transaction, trading and regulatory details. Depending on the set-up, the token and its information can be held publicly or on a private blockchain.

But technology is a world where lots of things are “interesting”. Some things quickly fall apart when they come into contact with reality and become a shake-your-head memory, like NFTs and the metaverse. Others, like the iPod and the internet, fundamentally changed the way we consume music and information. If it is to be the latter, we’re still only in the first stirrings of the revolution.

While the tokenisation buzzword has been around for a good few years, just $500mn worth of digital bonds were issued in the year to September 12, according to S&P Global Ratings, a mere drop in the vast debt market ocean (up to August this year, about $5.3tn worth of US bonds had been issued, according to Sifma).

“We’re still in the early days of tokenisation,” said Amarjit Singh, a partner at EY, but added that “it’s great to see firms dipping their toes in the water”.

One such firm is US asset manager Franklin Templeton, which manages $1.4tn worth of assets. The New York firm runs a tokenised money market fund and it has made efficiencies in the way it processes dull but crucial administrative tasks.

“For money market funds, each day there is some corporate action that is taking place in a fund. Interest rate accrual . . . dividend payout . . . Each time an action happens, the transfer agent updates the records,” according to Sandy Kaul, the money manager’s head of digital asset and investor advisory services.

“The benefit of doing this on blockchain has been you’re only updating one transaction record, not multiple [records].”

Hamilton Lane, an $820bn investment manager, has launched multiple tokenised funds. That has allowed them to tap “individual investors today who only want to operate with a digital wallet and they don’t want to do things in a non-digital world”, according to Erik Hirsch, vice-chair of Hamilton Lane.

But these types of real world efficiencies are proving a hard sell. For many, mentioning the word “blockchain” inevitably conjures up the negative image of the crypto world.

“When I say ‘token’ to people, too many people think crypto and I think making it clear that these are not related worlds, that alone honestly has been a surprising hurdle,” said Hirsch.

Kaul noted that other asset managers had a lot of worries about following suit. “You need the wallet system, you need the infrastructure, you need the regulatory clarity.”

Big firms are outsourcing the hard technology work. Hamilton Lane has turned to US fintech Securitize to do much of the heavy lifting for its tokenised funds.

Hirsch said going through one set of anti-money laundering checks when setting up on Securitize had really cut costs for both Hamilton and its investors. “How traditional private market funds work, they’re not easy, there’s lots of lawyers, know your customer and anti-money laundering processes that are complicated. If you want to do five funds you have to go through five of those processes,” but with a tokenised fund it’s one and done, he said.

Still, the question remains as to whether tokenisation is an iPod or an NFT. For it to really take off, there has to be demand. In spite of all the research papers and conference panels, the relatively few deals suggests there aren’t enough institutional investors clamouring for tokenised bonds, funds or equities yet.

Nor is there appetite for fund managers to go through the long and arduous process of creating the digital securities when they can avoid the hassle by buying the same funds the same way they normally do. As Hirsch admits, the funds “exist in token world and non-token world. We didn’t create unique things just for the token world.”

That’s a reflection of the limited tokenised-only demand. “To get there, it’s a huge leap from where we are now,” said EY’s Singh.

What’s your take on tokenisation of assets? Email me at [email protected]

Weekly highlights 

• US billionaire Mike Novogratz’s Galaxy Digital is setting up shop in Europe, enticed by both London and the EU’s progress in creating crypto regulations — a stark contrast to the US. 

• Tether, the world’s biggest stablecoin issuer, resumed lending out its coins to customers, less than a year after it said it would cease the controversial practice. It said it was to prevent customers from needing “to sell their collateral at potentially unfavourable prices, which could result in losses”.

• Hong Kong’s dream of becoming a crypto hub has turned sour after police arrested at least 11 people in connection with a widespread fraud at exchange JPEX.

• In crypto, even those tracking hackers can get hacked. Data provider Nansen was hit with a data breach, it said on Friday. It estimated that just under 7 per cent of users’ email addresses were exposed and a smaller amount had their blockchain addresses exposed.

Soundbite of the week: I’ll tell your mum

What do you do when your crypto chief executive of a son is giving you a mere $200,000 annual salary, rather than the $1mn you were expecting? Call on his mum for back-up of course!

That’s what Joseph Bankman did when his son — alleged fraudster Sam Bankman-Fried — wasn’t giving him a high enough salary, according to a court filing by the administrators of FTX, citing an email.

“Gee Sam, I don’t know what to say here . . . Putting Barbara on this.”

The disclosure is part of a lawsuit FTX filed against Stanford professors Bankman and his wife Barbara Fried, for misappropriating funds from the collapsed crypto exchange. As well as a juicy wage, SBF’s parents allegedly spent money on property, furnishings and flight tickets, among other lavish expenses.

Data mining: Binance’s dying token

Since the US Securities and Exchange Commission sued Binance US in June for violating securities laws by selling unregistered securities to investors, volumes on the exchange have collapsed. Compounding its woes, the venue’s chief executive departed last week and 100 jobs were cut, about a third of its employees, leaving the exchange not just barely trading but with bare operations too.

FT Cryptofinance is edited this week by Philip Stafford. Please send any thoughts and feedback to [email protected].