Recent regulatory shifts around cryptocurrency could unlock innovation and growth for tokenized traditional assets, too, Northern Trust’s head of digital assets for North America said.
Biden-era anti-crypto regulations and regulatory actions “weren’t just making it a challenge to work in the innovation space for crypto, but for all traditional digital assets, as well,” said Andy Czupek, the Northern Trust executive.
To a client, a tokenized bond is the same as a traditional bond, with the same value and stability by a slightly different name, Czupek said. The difference is in its infrastructure: Built on the blockchain, tokenized assets can provide benefits for banks and financial institutions.
With tokenization, settlement and reconciliation are “more efficient and faster and transparent, with data available directly to clients,” Czupek said.
“The fact that you can have more of a real-time pace to it and more of a transparent data capability allows for not only that speed and transparency, but also the elimination of certain mediating parties that cause more friction and more cost to be borne by the client,” he said.
Northern Trust launched its digital asset platform, now called Matrix Zenith, in 2017. It started as a blockchain administration system for the private equity market, developed with IBM. It’s since expanded to include other solutions, including one addressing digital carbon credits.
BNP Paribas found that, compared to a traditional two- to three-business days settlement cycle, tokenized bonds can settle in minutes, and potentially even seconds, from buying to ownership.
Czupek, who has been with Northern Trust since 2017, cut his teeth as a trader on the Chicago Stock Exchange (now NYSE Chicago) when he was a teenager.
The shift to tokenization “is not too dissimilar from 30 years ago, when we were transitioning equities and derivatives from pit trading and floor trading to electronic trading systems,” he said.
He likened working in tokenized assets to the thrill of the trading floor. “There’s so much possibility in this new infrastructure,” he said.
There’s a regulatory benefit to financial transactions on the blockchain network, Czupek said, because it would allow regulators to participate in audits, transactional reviews or any kind of regulatory oversight in a more immediate fashion.
“There’s a very strong risk type of prevention tool there,” he said. “But I think we’re still trying to all understand how you can process all that information, and that’s where [artificial intelligence] comes into it.”
AI could increase efficiency by analyzing large datasets to streamline decision-making processes in tokenized markets, according to blockchain firm Hedera. AI may also bring additional levels of security to tokenization due to its ability to detect and root out fraudulent behavior, according to financial crime prevention firm DataVisor.
“We’ve been working with our regulators for years around this, and I think all of us, from a banking standpoint, have been looking to the regulators as a source of information around, ‘are we providing the right types of risk mitigation techniques?’” Czupek said. “Because we want guidance from them as much as we want to provide guidance.”
Czupek said he expects the regulatory environment around tokenized assets to continue to evolve. Servicing clients with the nascent technology at Chicago-based Northern Trust for the past seven years “has been very much trying to make sure we meet the demand of the clients, especially as they come up and not after,” he said.
“The key to all of this is that we really want to make sure that we’re there for our clients with solutions when they need them, not building them when they say they need them,” he said.
