One of Europe’s largest banks is making a bold jump into the world of cryptocurrency and its new technology ecosystem, solidifying the crypto markets to a point where they become an essential part of the economy and finance that help people around the world.
BNP Paribas Asset Management has officially issued a tokenized share class of a French-domiciled money market fund directly on the public Ethereum blockchain.
This strategic maneuver signals a major evolution in how legacy financial giants view decentralized technology. By choosing to use a public (or non-private) network rather than a stand-alone (or private) blockchain, BNP Paribas is putting its full weight behind the advantages of an interoperable blockchain network and the large amount of liquidity available within that network.
Breaking Out of the Private Sandbox
For some time now, banks have been thinking about utilizing blockchains; however, in order to do so effectively, most banks have chosen to experiment using a closed environment that has been built entirely from scratch as well as controlled completely by the bank. BNP Paribas itself previously tested a tokenized fund in Luxembourg using exactly this closed-loop approach.
However, the launch of this new French-domiciled fund marks a sharp departure from that conservative playbook. The financial institution utilized its proprietary platform, AssetFoundry, to conduct an issuance of digital shares on the Ethereum blockchain. The public blockchain ecosystem continues to evolve towards a higher degree of acceptance by both individuals and institutions as the foundational building blocks of the future of global finance because of the strong network effects that have already developed in the general public’s use of the public blockchains.
The Mechanics of a Permissioned Public Fund
The fund is not open to everyone, even though the underlying ledger is public. BNP Paribas has created a permissioned access model on top of the Ethereum blockchain to comply with very strict regulatory requirements.
The transactions are recorded on a public blockchain, but only those participants who have satisfied the stringent identity verification and compliance standards are able to hold or transfer tokens. The Securities Services division at BNP Paribas acts as the transfer agent for the fund and manages the private key custody, which provides a seamless connection between traditional rigorous fund accounting and the innovative decentralized finance (DeFi) ecosystem.
Why Tokenize a Money Market Fund?
Money Market Funds are considered the backbone of corporate treasury and institutional liquidity management; however, the consensus is that the underlying plumbing behind Money Market Funds is sorely outdated. For example, traditional fund subscriptions and redemptions run on an end-of-day batch basis (think clunky), resulting in large delays until settlement.
By introducing tokenised versions of these assets, BNP Paribas has begun to explore ways in which batch processing can be replaced by continuous on-demand processing for fund subscriptions and redemptions. According to Edouard Legrand, Chief Digital & Data Officer BNP Paribas Asset Management, the rationale for this public blockchain test is to develop increased efficiency in operations. Tokenization of these assets eliminates long settlement times, increases transparency, and creates 24/7 trading opportunities.
The Revenue and Efficiency Play
Bringing real-world assets onto the blockchain is not just about upgrading legacy technology; it is a highly strategic business maneuver. Legacy financial institutions are actively hunting for ways to remain competitive in a rapidly digitizing economy.
By utilizing Ethereum, banks can effectively cut out expensive third-party intermediaries that typically bog down securities clearing and settlement. Furthermore, establishing a foothold in tokenized asset trading opens up entirely new alternative revenue streams. The prospect of obtaining fees from blockchain-based trades is appealing for banks wanting to access contemporary technological companies and their institutional customers.
A Watershed Moment for Global Finance
The pilots for this project will have implications that extend far beyond one particular French money market fund. Increasingly, leading firms in the industry see tokenization as the next great advancement in market infrastructure. Larry Fink, CEO of BlackRock, has referred to the current phase of asset tokenization as a “1996 internet moment,” saying it will completely revolutionize the global financial system.
So far, much of the focus has been on short-term debt and money market funds; however, the corporate equity and real-estate sectors are the ultimate targets. The ability to trade assets without any barriers based upon location or time is an attractive attribute. If even a small portion of the existing institutional liquidity were to migrate onto public blockchains, such as Ethereum, that would provide clarity that digital assets will be an integral and permanent component of the new, modern financial ecosystem.
