Rob Behnke
August 9th, 2023
The previous articles in this Tokenization series addressed tokenization in the real world. The first article taught us about tokenization, its usefulness for real-world assets, the security challenges involved, and measures to take to secure them. In the second article, we further explored permissioned chains, how to leverage them for tokenization, and the security measures to follow.
In this third and final article in the Tokenization series, we will learn about the tokenization of digital assets in the context of inter-bank transfers.
Inter-bank permissioned chains refer to blockchain networks facilitating tokenization and asset transfer between banks and financial institutions. They restrict access to authorized participants, ensuring confidentiality, privacy, and regulatory compliance. These chains offer a controlled and trusted environment for secure collaboration and efficient asset management among banking entities.
The Society for Worldwide Interbank Financial Telecommunication system (also known as Swift), has disclosed that it is working with banking partners to try out cross-chain tokenized assets. Banks and financial market institutions are beginning to embrace permissioned chain technology to build better systems that enhance the traditional banking experience.
Several different permissioned blockchain networks and tokenization platforms are available in the market. Here is a list of some notable ones:
Corda (R3): Corda is an open-source permissioned blockchain platform designed for enterprise use cases, including tokenization. It offers privacy, scalability, and interoperability features, making it suitable for inter-bank tokenization and other financial applications.
Corda Enterprise (R3): Corda Enterprise is the commercial version of Corda, offering additional features and support for large-scale deployments. It provides enhanced security, scalability, and performance capabilities for enterprise-level tokenization projects.
Digital Asset: Digital Asset's DAML platform provides tools and services for creating and managing digital assets on permissioned blockchains. It focuses on enterprise-grade solutions, offering fine-grained access control, privacy controls, and compatibility with various blockchain networks. You can learn more about Digital Asset and the Canton Network here.
Hyperledger Fabric: Hyperledger Fabric is an open-source permissioned blockchain framework developed by the Linux Foundation's Hyperledger project. It enables organizations to build and operate private, permissioned blockchain networks with modular architecture and support for smart contracts.
Quorum: Quorum is an open-source permissioned blockchain platform developed by J.P. Morgan and bought by Chainlink. It is built on Ethereum and provides additional privacy and performance enhancements for enterprise applications, making it suitable for tokenization projects.
Ethereum Enterprise: Ethereum Enterprise refers to using the Ethereum blockchain for enterprise-grade applications. It includes features such as permissions, private transactions, and enterprise-level scalability solutions.
IBM Blockchain Platform: IBM Blockchain Platform is a permissioned blockchain offering from IBM. It provides tools and services for building and operating enterprise-grade blockchain networks, including tokenization applications.
Stellar: Stellar is an open-source, permissioned blockchain platform focused on facilitating fast, low-cost cross-border transactions. It provides features such as asset tokenization and a decentralized exchange, making it suitable for inter-bank tokenization and remittance applications.
Hedera Hashgraph: Hedera Hashgraph is a distributed ledger technology platform that offers a permissioned network for enterprises. It provides high-speed, secure, and fair consensus through a unique consensus algorithm, making it suitable for tokenization and other financial applications.
It's important to note that this list is not exhaustive, and other permissioned blockchain networks and tokenization platforms are available in the market. The platform choice depends on the tokenization project's specific requirements, including scalability, security, privacy, regulatory compliance, and interoperability needs.
Streamlined Cross-Border Transactions
Inter-bank permissioned chains address the challenges of cross-border transactions by providing a secure and transparent platform for financial institutions to tokenize and transfer digital assets seamlessly.
This streamlined process eliminates intermediaries, reduces costs, and accelerates settlement times.
Improved Trade Finance and Supply Chain Management
Inter-bank permissioned chains play a vital role in enhancing trade finance and supply chain management processes. By tokenizing trade assets, such as invoices or bills of lading, banks can automate and streamline the flow of goods and finances, reducing paperwork, enhancing traceability, and mitigating fraud risks.
Enhanced Transparency and Trust
Inter-bank permissioned chains offer increased transparency and trust in the financial ecosystem. By leveraging distributed ledger technology, banks can maintain an immutable record of transactions, providing auditable and transparent visibility to regulators, customers, and other stakeholders.
The role of banks in the tokenization of real-world assets consists primarily of:
Providing custody services for the tokenized digital asset, securing and managing them for the investor or token holder.
Digitizing assets, like real estate, commodities, etc., by providing custody and security for the assets and creating tokens to back their ownership.
Issuing and distributing digital tokens to investors.
Providing trading services for digital tokens, including offering liquidity and other market-making services.
Ensuring compliance and regulation for the tokenized assets using checks like KYC and AML.
Santander issued a tokenized bond worth $20M on Ethereum in 2019. They made use of Nivaura, a tokenization provider. The bond remains on Ethereum until maturity, with investments tokenized as securities. VR Bank in Germany partnered with Lition in 2019 to process syndicated loans on Lition’s blockchain. They used Tokeny’s Token for Regulated Exchanges standard to issue security tokens. All of these were reported here.
A real estate security token issuance deal was also between Tokai Tokyo Financial Holdings and ADDX in 2021.
More recent examples are JP Morgan’s Onyx and Quorum, enterprise-grade blockchain tools built by the popular JP Morgan to handle JP Morgan’s blockchain-based products and services and meet the needs of other financial institutions.
The BIS Innovation Hub and the Swiss National Bank created Project Helvetia as an experiment to integrate tokenized assets with central bank money on a new SIX Digital Exchange platform.
In July 2023, the Montis Group successfully tokenized UK equities with adherence to the ERC-20 standards. The minted tokens are then securely stored in an Archax Nominees wallet on Hedera. In their current state, they can be transferred cross-chain when necessary.
All of these point toward the adoption of tokenization by traditional banks.
Now, let’s look at the possible challenges in inter-bank permissioned chains and possible measures for fixing them.
In previous articles, we have seen a handful of security challenges that can pose a threat to an inter-bank tokenization project. To add to the list, the following are important considerations to make while building enterprise-grade blockchain tools.
Blockchain technology provides opportunities for enhanced compliance monitoring through on-chain analytics. By analyzing transaction patterns, smart contract execution, and other on-chain data, banks can detect and investigate suspicious activities or potential compliance breaches. Additionally, specialized auditing tools and platforms exist to verify the security and reliability of tokenized assets, ensuring compliance with regulatory guidelines.
Independent audits conducted by reputable auditing firms like Halborn are crucial in establishing trust and credibility in the inter-bank tokenization ecosystem. These audits assess tokenized assets' accuracy, transparency, and compliance, providing stakeholders with an objective assessment of their quality and adherence to regulatory requirements. Certifications, such as ISO certifications or regulatory compliance certifications, further enhance the trustworthiness and marketability of tokenized assets.
Ensuring scalability and optimizing performance are vital considerations in inter-bank tokenization to handle increasing transaction volumes and meet the demands of the financial industry. Let's delve into the challenges and strategies related to scalability and performance optimization:
Interbank token transfers can involve a significant volume of transactions, which may strain the capacity of the underlying blockchain network. Potential bottlenecks may arise, leading to delays, increased transaction fees, or degraded network performance. Addressing these challenges requires careful planning and optimization strategies to accommodate high transaction volumes efficiently.
Layer-2 scaling solutions offer a promising approach to improve scalability in inter-bank tokenization. State channels and sidechains are examples of Layer-2 solutions allowing off-chain transactions, reducing the burden on the main blockchain network. Sharding, another technique, involves dividing the blockchain network into smaller partitions called shards, enabling parallel transaction processing and increased throughput.
Continuous performance monitoring is vital to ensure optimal operations in inter-bank tokenization. Real-time monitoring of transaction processing speed, confirmation times, and network latency help identify performance bottlenecks and potential optimization opportunities. Strategies for improving performance include optimizing network infrastructure, fine-tuning node configurations, and streamlining transaction validation processes.
In conclusion, secure tokenization on inter-bank permissioned chains safeguards digital assets, promotes transparency, and enables efficient collaboration among banking entities. Auditing and compliance monitoring ensure regulatory compliance and establish trust. Scalability and performance optimization strategies enable seamless operations in high-volume token transfers. Real-world case studies and best practices offer valuable lessons and insights for successful inter-bank tokenization. Banks can foster a secure and transformative interbank tokenization ecosystem by embracing these principles and continuously enhancing security measures.
To ensure the safety of your digital assets, get in touch with Halborn today.