Wall Street is beginning to embrace a crypto-utopian ideal that digital asset evangelists have long touted: The notion that the world would work better if more stuff were on blockchain. The movement is known as tokenization, which proponents argue will streamline the exchange of various “real-world” assets by tracking them on ledgers that underpin cryptocurrencies. It’s a trend that’s beginning to raise a host of new policy questions for Washington, beyond the more dramatic day-to-day battles that have dogged the space for the last several years. MM spoke with key players to help get you up to speed. Asset management giant BlackRock recently launched its first tokenized fund and invested in the firm that’s helping run it. The private fund, known as BUIDL, aims to maintain a stable $1 share price through its investments in cash, U.S. Treasury bills and repurchase agreements. The twist is that BUIDL shares will be represented by tokens on the Ethereum network, with yields accruing in investors’ digital wallets. As of the beginning of this week, BUIDL, which is limited to large investors, had attracted $280 million after launching on March 20. Why do this? Securitize CEO Carlos Domingo, whose firm is partnering with BlackRock to run the fund, told MM that tokenization eliminates capital markets “inefficiencies” in how assets change hands by cutting down on intermediaries. BlackRock CEO Larry Fink is a believer, telling CNBC earlier this year that he’s expecting “the tokenization of every financial asset.” “The whole idea is that blockchain as a public distributed ledger is a better way of representing ownership of things,” Domingo said. When it comes to the BlackRock fund, Domingo outlined a range of potential uses for crypto organizations in particular, noting that some struggle to open bank accounts. “We're solving for that by allowing [decentralized autonomous organizations], foundations and all these structures that exist in the crypto space to be able to access their account with us,” he said. “Some of these companies want to be transparent with what they do with their funds. They want to have transparency toward where their assets are. This is on-chain. You can go to Etherscan and the public blockchain and see holdings there.” (The blockchain at issue is pseudonymous.) Securitize has also launched funds with private equity giant KKR and investment manager Hamilton Lane. The firm is registered with securities regulators as a transfer agent, broker-dealer and the operator of an alternative trading system. Domingo has ideas on how U.S. regulations could be updated to facilitate further tokenization. He said the firm has been active on Capitol Hill, including talking to House Financial Services and its digital assets subcommittee. He pointed to the European Union’s so-called DLT pilot program as an example of a government taking a more explicit approach to rules for tokenization. At the moment, the U.S. Congress is focused mainly on stablecoins and how to divvy up crypto oversight between the SEC and the CFTC. “I would like to see a bill focusing on tokenization that basically helps clarify the gray areas of the space,” he said. “We've been active in those discussions. I think it would be less controversial than the other things, because we're just basically trying to improve capital markets and provide efficiencies and reduce the power of intermediaries, which I don't think anybody is against.” Securitize is a member of the new Tokenized Asset Coalition, which counts big crypto players Coinbase and Circle among its founding members. Mac Naggar, with the analytics firm RWA.xyz, said “pre-existing U.S. securities laws are adept at covering tokenized securities” but that “on an operational level, there is likely more work to be done for regulators in the United States.” Finance industry watchdog groups are urging further scrutiny of the tokenization push. Americans for Financial Reform’s Mark Hays cited cybersecurity concerns on Ethereum-based chains and the potential for instability. Domingo said the Ethereum blockchain has had 100 percent uptime since its inception and that Securitize’s product can deal with slowdowns or increased processing fees when someone issues a popular asset on the network. “Perhaps they [tokenization advocates] will harness blockchain for good—notwithstanding its use so far as the foundation for the crypto craze, which has created nothing of real value other than a tool favored by speculators, gamblers and criminals,” Better Markets legal director and securities specialist Stephen Hall said. “But because this application of technology has a limited track record in anything resembling legitimate finance, it needs to be closely monitored and regulated because serious risks to investors and the financial system could well emerge. Time will tell.” Happy Wednesday — Send tips to zwarmbrodt@politico.com.
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