Driving new markets: The opportunities ahead for enterprise blockchain technologies
While volatility reigned supreme in 2022, here at Hyperledger Foundation we are looking ahead with great excitement to what is possible in 2023. When CEOs of companies like Goldman Sachs and BNY Mellon are penning articles on the long-term value of distributed ledger and blockchain technology, we know the work our community is doing is building markets and creating opportunities. Hyperledger Foundation has been at the forefront of advancing open-source technologies that are transforming the way businesses operate. Since 2016, organizations around the world have been deploying these technologies to optimize speed, security, efficiency and trust in global markets and industries.
Blockchain’s value has already been established in a number of enterprise use cases: provenance tracking, logistics, cross border payments and more, where it is adding efficiency and cutting costs, while saving time and labor. One such proven example is the application of Hyperledger technologies in the partnership between MineHub and KrypC that has utilized Hyperledger Fabric to drastically improve upon the infrastructure necessary to power the supply chain of the mining industry. GSBN has also built a Global Trade Operating Platform with Hyperledger Fabric as the foundation. The historical lack of on-demand data in the shipping industry left the supply chain vulnerable to disruptions such as the Covid-19 pandemic. But with a single, efficient, immutable source of on-demand data, such disruptions can be dealt with much more effectively.
Now, there are a number of new and increasingly interesting markets and applications, especially tied to digital assets and tokenization, that are moving to the forefront of this market. The traditional infrastructure that powers the global financial system is slow, especially in comparison to the benefits blockchain technology provides. While data and information can already traverse the globe in seconds or less, value is not yet fully capable of moving at this speed or with the same efficiency. Although assets may appear to move instantaneously with the various online financial tools currently at our disposal, the movement of value itself is still quite slow. Settlement time for transactions still takes days and requires very expensive and lengthy processes in order to complete transactions properly.
Blockchain technology’s ability to alleviate friction in our current regulatory, financial and operational systems is in its capabilities as a piece of highly effective transactional and record keeping machinery. Anything can be bought, sold, transferred and accounted for on a blockchain, with data pertaining to those transactions stored on a distributed and immutable ledger for everyone included in the network to see. Asset tokenization enables the purchase, sale and exchange of digital assets, representative of potentially any asset, traditional or otherwise. This process facilitates the transfer of off-chain real-world assets’ economic value and ownership onto the blockchain.
By accelerating and improving the fractionalization of new asset classes, tokenization will expand the range of available and acceptable collateral beyond traditional assets. Tokenized representations of traditional assets such as cash, bonds, securities and equities, and even physical commodities like gold, stand to be a crucial evolution that will underpin future market infrastructure, just as computerized ledgers were transformational to the previous paper-based generation.
The progress made possible by distributed ledger technologies (DLTs) has enabled a much more capable and comprehensive system to verify assets and track their value. The foundational code of digital smart contracts, which automate the execution of an agreement between parties, are central to enabling this progress. Codified to self-verify and self-execute, smart contracts scale down on the time, formality and costs associated with traditional methods, without compromising on authenticity or credibility. In the past, banks have had to commit robust teams to uphold transactions from client to client, processing each piece of data manually and redirecting value as necessary. With smart contracts, that process occurs automatically, making them more effective and efficient than any traditional centralized entity while also fostering trust and presenting more transparent governance.
The key to widespread adoption of new, automated systems as the rails for widespread, cross-market transactions is creating a trusted technology infrastructure. At Hyperledger Foundation, we believe that open, shared development of the foundational technologies are central to meeting diverse business, consumer, and regulatory needs. Only through the application of open-development and open-source DLTs can we create trusted technology to serve as the backbones for these new financial systems.
Asset tokenization on open-source, open-governed distributed ledgers offers a solution to much of the inherent economic friction of the current global economy and has the potential to unlock a staggering amount of value. And the work has already begun. Using its new tokenization platform, Goldman Sachs arranged a €100 million two-year digital bond for the European Investment Bank with two other banks, all based on a private blockchain. Using traditional financial instruments, it would take a bond sale like this roughly five days to settle. It took just 60 seconds when tokenized on a private blockchain. Reducing settlement time will lower costs across the entire market for banks, customers and even regulators, making markets incredibly more efficient.
The use cases for this technology extend into the public sector as well. Hyperledger’s DLTs have been at the forefront of innovation and tokenization in the global exploration and development of Central Bank Digital Currencies, or CBDCs. Our DLTs are built in the open, with vendor neutral governance and can be deployed in several production networks across sectors, including Central Banks. Central bank money traditionally takes the form of cash or reserves held by eligible financial institutions at the central bank. CBDCs, on the other hand, are a newly developed concept that could become a third version of a national currency that is tokenized and would rely on use of an electronic record or digital token to represent the digital form of a nation’s currency. There are a number of countries already working to develop CBDCs utilizing Hyperledger’s open-source, open-governance distributed ledgers Hyperledger Fabric, Hyperledger Besu and Hyperledger Iroha.
Aside from transforming currencies and bonds, asset tokenization is being applied to a range of securities and other financial assets, including physical ones. Tokenized on-chain assets in particular have the potential to unlock access to liquidity in the market while increasing freedom and access for investor capital. Traditionally illiquid assets, such as real estate or fine art, can have their value unlocked through the process of tokenization, which opens the door to tremendous possibilities for new investment. Case in point: Global law firm DLA Piper recently launched its TOKO tokenization platform to issue non-fungible tokens across asset classes including real estate, fine art, debt and even intellectual property. Toko is a digital asset creation engine to solve inefficiencies in today’s capital markets by using DLTs to distribute, trade and settle transactions rapidly, bypassing the need for trusted third party intermediaries that are both expensive and slow. It is built using the combination of a permissioned Hyperledger Fabric network and the Hedera Token Service.
The technology also facilitates positive environmental impacts and ESG reporting. For example, a recently concluded trial conducted by the United Nation, Bank of International Settlements (BIS) and the Hong Kong Monetary Authority successfully resulted in two separate prototypes of tokenized green bonds. Built using Hyperledger Besu along with technologies from Digital Asset and Allinfra Climate, the prototypes ensure the tracking of mitigation outcome interests (MOIs), an essential aspect of environmentally focused economic efforts.
This is just a sampling of the growing impact of asset tokenization. A new report from Boston Consulting Group (BCG) and ADDX estimates that asset tokenization will reach $16 trillion by 2030, or 10% of global GDP. To put that figure in context, in 2020 the total assets under management for ETFs were $7 trillion, and total real estate investment trusts (REITs) were worth $2.5 trillion in 2021. As we already see across our community, the breadth of use cases for DLTs and tokenized assets stretches across industries, with the potential to dramatically improve upon much of the critical infrastructure that the global economy currently relies on.
Despite industry disruptions and market fluctuations, we are continuing to build enterprise-grade DLT technology that unlocks a previously unimaginable amount of capital and value. As we move forward into the new year, the Hyperledger Foundation is committed more than ever to fostering a robust and diverse ecosystem for open-source enterprise-grade blockchain technologies that will power new financial systems and models, while serving markets around the world. It’s what we call building better together. Come join us. All are welcome.