Banks' interest in tokenization and CBDCs is growing. The potential of tokenization to transform finance, banks, and other financial institutions is enormous.
There are several examples in this regard as Banco Santander's bond tokenization pilot on the Ethereum network, an event that took place in 2019. Other institutions, such as Citibank, have also conducted several experiences.
Recently, HSBC launched Orion, a DLT-based bond tokenization platform used to issue sterling tokenized bonds under Luxembourg law. The solution allows tokenization of the digital bond as the currency used for settlement, enabling atomic settlement or delivery versus payment (DvP). All this, thanks to Hyperledger Fabric technology, underlines the quality of this enterprise's open-source software development.
Experiences such as those of NY FED, Citibank, or HSBC are just a sample of the potential of tokenization in finance. All these institutions aim to reduce the risk of their operations. Many of these corporations mobilize billions of euros/dollars per day. Instead of real currency, they often mobilize financial instruments that are challenging to keep track of and securely audit.
Banks are the first to be interested in having a regulation that allows them to freely apply this type of technology in their products and services. Blockchain technology has been working for more than 14 years as a fundamental pillar of cryptocurrencies such as Bitcoin. In all this time, it has proven its security and suitability, implying that the global financial future involves the arrival of digital money and CBDCs and the tokenization of all financial instruments. This step will represent the complete transformation of the financial system as we know it today.
CBDCs to settle transactions
The New York Federal Reserve (NY FED) and the BIS Innovation Center recently unveiled the Cedar Project. It is a joint study to study how CBDCs (central bank digital currency) can help the financial system quickly settle transactions conducted in foreign currency (FX), using tokenization capabilities and its potential to improve banking operations.
The report intends to improve payment settlement times, which typically take two to three days to complete. In this regard, CBDCs could enable an atomic transaction that would make such payments instantaneous. Except in exceptional cases for KYC/AML reviews, which would take 24 hours. The study focused on the speed of operations and security, cost reduction, accountability, and 24/7/365 operations.
The report praises the capabilities of CBDCs for global financial operations that do not conflict with time zone usage and security, let alone compliance with applicable international regulations. It also highlights the capabilities of CBDC technology and tokenization.
Competing with the digital Yuan
NY FED highlighted that the study seeks to complement reports that could lead the Federal Reserve (FED) to make a final decision on the generation of a digital dollar that competes directly with the digital Yuan or other currencies that may emerge in the future. Also, NY FED stresses the importance of shortening Payment versus Payment (PvP) transaction times and improving the capabilities of the global financial system to cope with an ever-increasing flow of capital. The current system's principal risks and critical points are speed, external service disruptions, and counterparty risk. According to the tests performed, we can use CBDCs for payments to overcome all these weaknesses.