KEY POINTS
- The efficiency of having the most liquid traditional asset class on the blockchain has become 'critical': Fireblocks's Neil Chopra
- Demand for on-chain yield products as part of a digital treasury has increased amid increasing blockchain tech adoption
- The industry should be proactive in pushing for clear 'rules of the road' to challenge the lack of regulatory clarity, Chopra said
- He noted that a 'friendlier regime' should open more doors toward broader adoption of crypto and blockchain-based products
The assets under management (AUM) of on-chain U.S. Treasury funds have tripled this year to hit $2.48 billion, marking a significant transition in the tokenization of financial assets and reshaping the global investment landscape.
U.S. Treasuries are at the forefront of the revolution as remarkable growth in tokenized U.S. Treasuries underscore the convergence of institutional adoption and technological innovation – a scenario that seemed impossible decades back.
In an exclusive with International Business Times, Neil Chopra, Senior Director of Banking and Asset Management at enterprise-grade platform for digital asset infrastructure Fireblocks, discussed the apparent growing interest in tokenized U.S. Treasuries and their potential for further growth especially within an evolving regulatory landscape.
What are Tokenized US Treasuries and Why Do They Matter?
Basically, tokenized U.S. Treasuries are digital representations of U.S. government bonds. They can be traded as tokens on various blockchains such as Ethereum and Solana.
While tokenized Treasuries have been ringing bells in the blockchain sector for quite some time now, interest in the offerings surged significantly after asset management titan BlackRock announced its BUIDL tokenized money market fund.
Beyond BUIDL, tokenized U.S. Treasuries are already standing out above other blockchain-related offerings. Chopra noted that tokenization's value lies in unlocking new utility or usage of an asset. However, tokenized treasuries are on another level.
First, they allow on-chain companies "to access yield-bearing assets as part of their digital treasury without having to on and off-ramp to traditional rails," and they also enable "more efficient collateral mobility between trading counterparties, starting with the institutional crypto trading ecosystem."
One of tokenization's key benefits is collateral mobility, but such assets require liquid markets. Notably, U.S. Treasuries are the most liquid traditional asset class, so "having an on-chain asset that can quickly on/off-ramp into cash is critical," Chopra noted.
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What's Driving Interest?
Stablecoins and other forms of tokenized money have seen accelerated adoption in recent years, starting inside the crypto ecosystem and now, expanding to use cases such payments.
Chopra explained that there are various factors affecting increased interest in tokenized U.S. Treasuries, and chief among them is the search for high-yield and low-risk offerings among fund managers and crypto firms.
"With more start-ups and crypto companies adopting wallet and blockchain technology and enterprise-grade infrastructure becoming more widely accessible and adopted, we are seeing demand for on-chain yield products as part of a digital treasury," Chopra said.
What are the Hurdles for Broader Adoption?
As was the case for many cryptocurrency and blockchain initiatives, the lack of regulatory clarity around tokenization has become a major barrier for broader mainstream adoption and scaling of tokenized U.S. Treasuries.
"Regulatory clarity, which includes custody rules, securities regulations, and differing views globally," is necessary to allow further growth and adoption around tokenized U.S. Treasuries, Chopra said.
U.S. Treasuries are at the core of liquidity in financial markets and a pro-innovation regime at the U.S. Securities and Exchange Commission (SEC) should provide the guidance the segment needs to validate and prove the benefits of blockchain technology.
On the other hand, there should also be proactive movement from the industry. "While the enforcement actions against the industry have brought a lot of ambiguity to the status of cryptocurrencies, we as an industry should also be pushing for clear regulations and 'rules of the road' for the application of blockchain technology in traditional financial markets," Chopra pointed out.
Aside from inadequate clear rules for blockchain-related initiatives, another hurdle for wide tokenized U.S. Treasuries adoption is interoperability among various blockchains, which then affects the liquidity of tokenized assets.
Finally, Chopra believes there is a need for institutional education, including "proving the incremental value and utility of tokenized assets compared to their traditional counterparts" and understanding the technology and how it interacts with existing systems and interfaces so consumers can clearly see the benefits without studying the complexities that happen behind the scenes.
A Friendlier Regime to Foster Growth
Donald Trump's presidential win has ushered in a new era of optimism among crypto and blockchain users. Crypto leaders are expecting the industry to be given more space for development and innovation now that a pro-innovation administration is set to enter the White House.
SEC Chair Gary Gensler has confirmed his pre-term resignation, announcing he will step down during Trump's inauguration on Jan. 20, 2025. His announcement invigorated the crypto community and sent Bitcoin to a new all-time high above $99,000.
Chopra agrees that a "friendlier regime" will foster growth in multiple ways, including the re-opening of the banking system to allow blockchain startups to access banking services.
The 2024 U.S. election has sparked new conversations about the future of digital assets. What could changes in Congress mean for stablecoins, market resilience, and regulation?
— Fireblocks (@FireblocksHQ) November 15, 2024
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He added that a forward-looking government will also provide guardrails for institutions to allow new entrants to start providing crypto and blockchain-based products and services, and also encourage first movers already involved in the space to expand and scale their next phase of growth.
More importantly, he expects the new administration to provide more assurance to the broader retail market that "this is a safe and sound market and technology," which will then encourage more consumers and traditional institutions to adopt emerging offerings such as tokenized U.S. Treasuries.
Fireblocks is at the frontline as the tokenized U.S. Treasuries segment rises. It works with leading players in the space, such as Ondo Finance, Hashnote, Centrifuge, and Ondo Finance, which are spearheading the shift in the tokenization of financial assets.
