“ETFs are step one in the technological revolution in the financial markets; step two is going to be the tokenization of every financial asset.” – Larry Fink, 12 Jan 2024 (via CNBC)
This article is not intended to be a hagiography of BlackRock, but rather using them as an example of what the more progressive institutions in the world are doing. In South Africa, we don't yet have anyone doing what BlackRock is doing. But: we do have a clear regulatory framework for CASPs; a regulator who is committed to exploring this technology, including a paper this year on blockchain based financial infrastructure; we have several large banks and exchanges exploring blockchain products in a project overseen by the Reserve Bank; we have a stablecoin backed by a large insurer; and there is much more that is not yet public. Any leader of a financial institution who is not yet thinking properly about the implications of tokenisation and web3 may be failing in their fiduciary responsibility, given the impact this technology will have over the next few years.
Whether we call it blockchain technology, crypto, tokenisation, web3, or whatever, you either understand that it is coming to financial services, or you just don't understand. If you don't, then here is some evidence from BlackRock, the manager of about ten trillion dollars in assets. For scale, the entire South African asset management industry is a small fraction of this size. For additional context, BlackRock is headquartered in the US, which is probably the least developed significant jurisdiction in terms of crypto regulations.
Along with several other large managers, BlackRock launched a spot Bitcoin ETF in the US in mid January 2024. BlackRock's ETF now (early June 2024) sits at about $20 billion in assets. This is the ETF that is shortly to be made available to Discovery customers in South Africa, wrapped as an endowment. Authorised participants include the likes of JP Morgan, Macquarie, Goldman Sachs, Citigroup, and UBS. Spot bitcoin ETFs were first available in Canada in 2021, and in Europe since late 2023. Other US companies with ETFs include Fidelity Franklin Templeton, WidsomTree and VanEck. In the US, these ETFs have grown faster than any previous ETF has done.
So perhaps BlackRock are merely jumping on the crypto bandwagon - there is customer demand for exposure to this new asset class, and you could portray this as an opportunistic response to that, albeit a very large one. Unless they do some other stuff?
The ETF is step 1, and the tokenisation of every financial asset is step 2, according to Larry Fink; this is the start of the other stuff. The BlackRock US Dollar Institutional Digital Liquidity fund ("BUIDL" - playing to a crypto meme) launched in April 2024. It is issued as an ERC20 token on the public Ethereum network (you can see the details on chain here). The underlying assets are cash, short dated Treasury bills and repurchase agreements, managed by BlackRock. Each BUIDL token is worth one US dollar, and growth in the fund is sent directly to token holders' wallets as an issue of new tokens. At the end of May 2024, this fund was sitting at about $450 million. A partnership with Circle, the issuer of the USDC stablecoin, provides instant redemption, on chain, to USDC. To translate: an institution can hold a tokenised version of a treasury fund, with instant liquidity into a crypto-dollar as required. BNY Mellon are the custodians, and PwC are the auditor of the fund. Other ecosystem participants include Anchorage, Coinbase, Fireblocks, and tokenisation company Securitize, in which BlackRock is an investor.
What we now have is therefore a regulated, traditional structure for the largest crypto asset - Bitcoin. ETFs for Ether (the second biggest cryptocurrency) are expected soon, perhaps as early as this month (June 2024) - they were approved in May. On top of that, BUIDL is effectively an interest bearing stablecoin.
From BlackRock's BUIDL press release: “Tokenization remains a key focus of BlackRock’s digital asset strategy. Through the tokenization of the Fund, BUIDL will offer investors important benefits by enabling the issuance and trading of ownership on a blockchain, expanding investor access to on-chain offerings, providing instantaneous and transparent settlement, and allowing for transfers across platforms.”
That last bit is interesting, and gives us some indicators of what might come next: "... allowing for transfers across platforms". BlackRock are anticipating the holders of BUIDL using it across other platforms (or protocols), which would enable other products and services to be built on this. BlackRock provides the pieces; you build what you want. Ondo Finance have been tokenising tradition "real world" assets for a while, and are now one of the larger holders of BUIDL. Their on chain products are thus built on top of BlackRock's brand reputation. In traditional finance, building an automated treasury management system using BUIDL and USDC is an obvious use case, but there is much more to come as innovators and institutions become more comfortable incorporating this technology.
There are further clues to what comes next if you look at some of the material BlackRock has published. This chart is interesting, for a start:
There is a shift from bank deposits to money market funds, which is what BUIDL is. So BlackRock is replacing banks in this regard, with a tokenised offering. It's a short leap to think of other areas where this could happen, as the boundaries around banking blur further, and other types of financial institutions start to take on the roles that banks used to fulfil. So what makes banks unique? One answer is taking deposits, but what is the practical difference between a bank account and a savings instrument that provides liquidity on demand? This liquidity is in the form of stablecoins, taking the place of bank transfers or cash. This is an upgrade in utility - a fully digital, fully backed, programmable money is better than anything the traditional system can offer, if we assume adoption by payments systems, and regulatory clarity. Did I mention that PayPal has a stablecoin, Visa are experimenting with USDC settlement, and the world's remittances are moving to crypto and stablecoins?
Back to BlackRock. They are tracking the Future of Finance as one of five "mega forces" in financial services. From that work:
"Activities that previously were bundled together in the same institution, such as deposit-taking and lending in banks, can be unbundled. We see that unbundling continuing to play out as banks and other financial institutions innovate, regulation evolves and technology develops around payments, digital currencies, the tokenization of assets and artificial intelligence."
I read this as BlackRock claiming a position for themselves in the new, tokenised, financial system. When we end up with global blockchain infrastructure, who will the big players be, providing the foundations of this future model? Why not BlackRock?
So what are large institutions more broadly doing? There are two common approaches. One is to provide crypto to clients, e.g. giving access to crypto funds, like Easy Equities in South Africa, or like Discovery are doing with BlackRock's bitcoin ETF. This is crypto as a new asset class; plugging a new product into existing business models.
The second approach is crypto as infrastructure. This includes things like the work with tokenised deposits, tokenised instruments and CBDC - experiments like Project Khokha from the SA Reserve Bank, the Regulated Liability Network projects in the US and UK, or BIS Project Agora. This is applying the better technology to old models of money and finance.
But to think of the change as either a new asset class or a new infrastructure is a false dichotomy. It is both. Crypto as product and crypto as infrastructure are inextricably linked, and the transformation will come from embracing new business models and recognising the potential of blockchain based infrastructure. Executives in financial institutions should be studying innovators like BlackRock and others, but also those in DeFi, where innovation around FS is rife and rapid. These analyses can drive scenario modelling and other strategic work. The challenge is to choose and articulate your role in a tokenised financial system. Scenarios are a helpful way of thinking about potential futures, building a possible outcome and identifying what would get us there. Projecting BlackRock's actions as I have done here is just one possible angle.
If you go back to Mr Fink: step one is the ETF, step two is the tokenisation of everything. Everything. That's when life gets interesting.
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