Traditional Finance Embraces Tokenization And, Selectively, Crypto

BIS and IMF propose new ledgers to modernize finance while BlackRock seeks approval for a Bitcoin ETF

The BIS Tower in Basel, Switzerland The BIS Tower in Basel, Switzerland

Compiled by the Oliver Wyman Forum

Mainstream financial institutions are making fresh efforts to develop distributed ledger technologies and cryptocurrency businesses notwithstanding the recent US regulatory crackdown on crypto firms. The Bank for International Settlements published a blueprint for a unified ledger bringing together digital currencies, tokenized deposits, and tokenized assets, while the International Monetary Fund outlined a similar proposal for promoting faster and cheaper cross-border payments. BlackRock and two other asset managers filed for regulatory approval of spot Bitcoin exchange-traded funds (ETFs) while a consortium of financial firms launched a new cryptocurrency exchange, EDX Markets. These are among the notable recent developments in the future of money.

Policy Front

BIS Publishes Blueprint For A Tokenized Monetary System

The Bank for International Settlements (BIS) on June 20 published a proposal for a new global monetary system built around a unified ledger that would enable central bank digital currencies (CBDCs), tokenized deposits, and tokenized assets to trade on a single network, or network of networks.

Tokenization, which creates digital versions of financial and real-world assets, can dramatically enhance the capabilities of the financial system by eliminating the need for separate messaging, reconciliation, and settlement processes and enabling programmable transactions, the BIS, known as the central bank for central banks, said in a chapter of its annual report. While crypto markets and decentralized finance provide glimpses of that potential today, the inclusion of central bank money in a unified ledger would provide a foundation of trust needed for tokenization to scale and enable innovation by the private sector, it added.

Collaboration between the public and private sector will be essential to develop technology solutions and ensure proper oversight and supervision, the BIS said. The process may begin with ledgers for specific applications, such as securities settlement or trade finance, with those ledgers linking through application programming interfaces, or APIs, into a network of networks. The aim would be to provide financial market participants “the same seamless operation of the monetary and financial system as the seamless interactions of apps on their smartphones,” it added.

The proposal builds on ideas floated by BIS General Manager Agustin Carstens in a February speech and a number of recent experiments conducted by central banks working with the BIS Innovation Hub.

IMF Proposes Multicurrency Ledger For Cross-Border Payments

The International Monetary Fund (IMF) on June 19 proposed the creation of a new class of cross-border payments platforms, built around a single ledger and enabling programmability, to promote faster, safer, and cheaper international payments.

The proposal calls for creating a single trusted ledger that is interoperable both across borders and with legacy systems; promoting safety by settling transactions with digital versions of central bank reserves; and fostering innovation by allowing the private sector to tailor financial services with programmable functions. Such a platform would be truly multicurrency and would not require the creation of a new or single settlement asset. The design also could be adopted to transform domestic wholesale payments, the paper contends.

The proposal could save some of the estimated $45 billion in fees that people pay each year to send remittances back to their home countries, Tobias Adrian, a co-author and Director of the IMF’s Monetary and Capital Markets Department, said in a speech at a conference in Morocco.

Business Developments

BlackRock And Two Others Seek Approval For Bitcoin ETFs

On June 15, the iShares subsdiary of BlackRock filed with the US Securities and Exchange Commission to offer an exchange-traded fund (ETF) giving investors exposure to the spot price of Bitcoin.

The filing, coming barely a week after the SEC sued cryptocurrency exchanges Binance and Coinbase for alleged violations of securities laws, indicated continuing interest among institutional investors in gaining access to crypto in a regulated environment. On June 20, asset managers Invesco and Wisdom Tree filed their own applications for Bitcoin ETFs.

The SEC has rejected previous efforts to launch Bitcoin ETFs, including from Invesco and Wisdom Tree, citing among other things potential price manipulation in the market, but none have come from an institution like BlackRock, the world’s largest asset manager with $9.1 trillion in funds under management at the end of March.

A separate filing by Nasdaq, the exchange where the proposed iShares Bitcoin Trust would be listed, said Nasdaq would enter into a surveillance-sharing agreement with a spot trading platform for Bitcoin to guard against potential manipulation. In its filing, Invesco said the lack of an ETF forces investors interested in Bitcoin “to find alternative exposure through generally riskier means.”

In the five days following the filing, the price of bitcoin rose 10% to a little over $28,000, and its share of the market capitalization of all cryptocurrencies rose above 50% for the first time in two years on June 19. In the same five days, the share price of the Grayscale Bitcoin Trust, which had been trading at a large discount to the value of its assets, rose by more than 20%. Grayscale has sued the SEC in a bid to force the agency to allow it to convert its trust into an ETF.

EDX Markets Launches Trading In Four Cryptocurrencies

A new digital assets platform backed by several leading US financial institutions opened trading in Bitcoin, Ether, Litecoin, and Bitcoin Cash on June 20.

EDX Markets, whose founding investors include Charles Schwab, Citadel Securities, Fidelity Digital Assets, Paradigm, Sequoia Capital, and Virtu Financial, said it aimed “to enable safe and compliant trading of digital assets through trusted intermediaries.” The firm has adopted a non-custodial model to mitigate potential conflicts of interest that can arise at exchanges that hold customer assets.

A16Z Plans To Open London Office Focused On Crypto

Andreessen Horowitz, a leading venture capital investor in crypto startups, on June 11 announced it would open its first non-US office in London, citing the United Kingdom’s tech talent, academic institutions, and a constructive government approach to regulating the sector.

“We believe that the UK is on the right path to becoming a leader in crypto regulation,” Chris Dixon, head of the firm’s crypto practice, a16z crypto, said in an online release announcing the move. The firm also announced it was leading a $43 million investment in Gensyn, a UK outfit building a decentralized network for training artificial intelligence (AI) models.

Deutsche Bank Seeks Crypto License In Germany

Deutsche Bank has applied for regulatory permission to offer cryptocurrency custody services with Germany’s Federal Financial Supervisory Authority, known by its German acronym BaFin, Coindesk reported on June 20.

The bank previously said it planned to build out a digital assets platform in stages, and would eventually enable customers to buy and sell digital assets through prime brokers and provide services such as fund administration, lending, staking and voting.

Crime Beat

Crypto Hacking Said To Help Finance North Korea’s Nuclear Program

North Korean hacking of cryptocurrency enterprises is financing roughly half of the country’s ballistic missile program, the Wall Street Journal reported on June 11, citing US government officials.

The country has been carrying out computer attacks for years, including such notable incidents as the theft of data from Sony Pictures in 2014 to the Wannacry global malware attack in 2017. Since it started focusing on cryptocurrency ventures in 2018, the country has stolen more than $3 billion, including $600 million taken last year from the Web3 play-to-earn game Axie Infinity, the article said, citing blockchain analytics firm Chainalysis.

US Charges Two Russian Nationals With Mt. Gox Hack

Shedding light on one of crypto’s largest-ever thefts, the US Department of Justice has charged two Russian nationals, Alexey Bilyuchenko and Aleksandr Verner, with conspiring to launder approximately 647,000 bitcoins from the 2011 hack of Mt. Gox, which was the world’s largest cryptocurrency exchange at the time.

According to an indictment unsealed by a federal judge on June 9, Bilyuchenko and Verner gained access to Mt. Gox’s computer server in or about September 2011, and through at least May 2014 transferred bitcoins from wallets holding customer assets to addresses the two men and their unidentified co-conspirators controlled. The coins, then worth over $350 million, would be worth over $18 billion at June 20th prices. The exchange suspended operations and filed for bankruptcy in February 2014, when news of the theft hit the market.

Separately, Bilyuchenko also was charged with conspiring with Alexander Vinnik to operate an illicit cryptocurrency exchange, BTC-e, from 2011 until it was shut down by law enforcement authorities in 2017. That exchange was allegedly used to launder funds for cyber criminals. Vinnik was arrested in Greece in 2017, convicted of money laundering in France three years later, and is now awaiting trial in California on charges of running BTC-e.


Crypto Likely To Remain Volatile Unless Use In Payments Expands, Study Says

The value of cryptocurrencies is likely to remain much more volatile than fiat currencies unless crypto starts to be used more for payments purposes rather than held as an investment, according to a research paper published on June 7 by the Bank for International Settlements (BIS).

The paper, written by BIS Senior Adviser Rodney Garratt and R.C. van Oordt, an associate professor of finance at Vrije Universiteit Amsterdam, introduces a concept called the crypto multiplier, which measures the response of a cryptocurrency’s market capitalization to the aggregate inflow and outflow of investor funds. The multiplier has a high value, and the cryptocurrency is more volatile, when a large proportion of coins are held for investment rather than for payment.

Blockchain data suggest the multiplier is large for several major cryptocurrencies, the authors write, noting that more than 75% of bitcoins and around 60% of ether were held in addresses that had not been used in the previous six months.