As the adoption of blockchain technology continues to rise, thanks in part to the increasing prominence of real-world asset (RWA) tokenization, leading financial institutions have realized the trend is not slowing down and have decided to join the race to create a more efficient and sustainable financial system.
Citigroup is the latest institution to deepen its involvement with blockchain as the company has announced the completion of a simulation conducted in conjunction with Wellington Management and WisdomTree that demonstrated how a private equity fund can be tokenized on a blockchain network, opening the door for a higher level of adoption by Wall Street.
The proof-of-concept (POC) project showed that it’s possible to issue and custody tokenized versions of private equity funds on behalf of clients in a controlled environment while remaining compatible with existing bank systems.
The trial, which was conducted on the Avalanche Spruce institutional test Subnet, “found that smart-contract capabilities could deliver new functionality and operational efficiencies, which are currently unavailable with traditional assets,” Citigroup said. “These new functionalities could enable buy- and sell-side institutions to engage with distributed ledger infrastructure in a low-risk, low-barrier-to-entry manner that is consistent with regulations.”
Related: Real World Asset tokenization and the future of financial markets: Part 1
Citigroup noted that the current infrastructure underlying private equity markets is “complex and manual,” and lacks standardization and transparency, which leads “to inefficient distribution and operations.” They added that “there are often complex legal and regulatory restrictions related to private assets.”
In the POC, ABN AMRO simulated the role of a traditional investor and tested the tokenization of a Wellington-issued private equity fund by bringing it onto a blockchain network. The underlying fund distribution rules were encoded into the smart contract and embedded in the token transferred to hypothetical WisdomTree clients.
“The proof of concept demonstrated how smart contracts could be used to enable greater automation and potentially create an enhanced compliance and control environment for issuers, distributors, and investors,” Citigroup said.
The trial also explored a variety of scenarios that involved transfers using smart contracts relying on “simulated identity credentials issued by WisdomTree and using a private fund token as collateral in an automated lending contract with DTCC Digital Assets (formerly Securrency),” the press release said.
The main purpose of the POC was to explore the relevant technical, legal, and operational frameworks needed to bring traditional assets onto a digital platform. This would enable the bank to support clients issuing and accessing tokenized private assets in a controlled and scalable manner while ensuring interoperability with the traditional ecosystem.
“Smart contracts and blockchain technology can enable enhanced rule enforcement at an infrastructure level, allowing data and workflows to travel with the asset,” said Nisha Surendran, Emerging Solutions Lead for Citi Digital Assets. “We believe that by testing the tokenization of private assets, we are exploring the feasibility to open up new operating models and create efficiencies for the broader market.”
Maredith Hannon Sapp, Head of Business Development for Digital Assets at WisdomTree, called blockchain-enabled finance “the future of the industry.”
She said this POC “showcases the ability to explore the transferability of tokenized funds and related compliance in different markets. This will inform future in-production use cases of how blockchain technology and smart contracts can be used in on-chain transactions.”
Citi said they will use the results of the simulation to help determine whether it is in the bank's financial interest to offer services in the area of real-world asset tokenization. In September, the firm launched a digital-asset service for institutional clients which is capable of transforming customer deposits into tokens that can be sent anywhere in the world.
Related: Real World Asset tokenization and the future of financial markets: Part 2
RWA tokenization is a popular topic of discussion in the cryptocurrency ecosystem, and many see it as the next stage in institutional adoption following the launch of multiple spot Bitcoin ETFs in the United States.
According to Shayne Higdon, co-founder and CEO of the HBAR Foundation, “The total available market for real-world assets is estimated to be worth between $3.5 trillion and $10 trillion by 2030, making it one of the largest market opportunities.”
“Currently, the estimated value of the tokenized assets market is over $100 billion USD,” he said. “However, there is significant work needed to address current shortfalls in the user experience, and to enable seamless and transparent tokenization. It’s not merely technology integration that’s required – in many cases, a complete business shift is necessary.”
Based on the scale of the opportunity, it’s likely that this POC by Citigroup is only the first in a series of trials that will be conducted by the world's largest asset managers and financial institutions as the integration of blockchain technology advances in the years ahead.
