Citi Perspectives 2024 E-commerce Edition

Gaining wider acceptance The theoretical conditions for adoption of tokenization by the regulated financial sector, and indeed corporate treasury, seem to have been established. But achieving it in the real world generates a fewmore challenges, notes McLaughlin. The first hurdle is using public blockchains, such as Ethereum, in the regulated space. “They would need to pass third-party risk management tests,” he explains. Enhanced due diligence is demanded of all external providers seeking to work with a regulated body such as a bank, and public blockchain ownership is difficult to assess. Private-permissioned blockchains offer a more controlled environment, but this too presents issues, notes McLaughlin. “In today’s world, the model is fragmented, with individual banks or a few sub- scale consortia building their own structures, each using different blockchains that don’t necessarily talk to each other.” While individual banks, with individual blockchains, can still enhance money movements within their own closed systems, it’s still suboptimal for the typical multi-banking corporate. For the whole notion of tokenization to be optimized for corporate treasury, McLaughlin says there is a need for a network that is usable by multiple banks, or at least interoperability between multiple subnetworks. The idea that in the future everything will be tokenized is, he feels, “somewhat polluted by the conflicting interpretations of tokenization adopted by the crypto and the regulated industries.” While that confusion remains, proprietary bank-driven blockchains, and those of existing consortia, are generally finding it difficult to scale up. “What we are missing is that consensus to build something at industry scale.” Pushing for progress This calls into play the idea of the Regulated Liability Network (RLN). This is a collaborative effort between several stakeholders intent on exploring the likelihood of achieving consensus toward a new blockchain-driven financial market infrastructure. In its own words, RLN is considering “the technical, legal and business characteristics necessary to provide on-chain, 24/7 programmable, final settlement in sovereign currencies, consisting of the liabilities of both public and private regulated financial institutions.” And in five years’ time, we’ll have a much clearer picture as to whether this vision of tokenization can be delivered and if we have industry consensus. | 35 Natural Progression: Why tokenization really could be the next big thing