From Hype to Investment: The Changing Face of Blockchain

Blockchain was quite the buzzword just a couple of years ago; tracking alongside bitcoin, it generated quite a bit of hype and more than a few headlines before, for many financial professionals, seemingly fading back into the background.

While those days of big headlines and market-redefining hypothetical use cases may be over, now, blockchain hasn’t gone anywhere. Investors have taken notice of the technology, and the new developments taking shape in the emerging field of digital assets are very real.

Northern Trust, a major Chicago-based bank that has long focused on institutional investment throughout its more than a century in business, has been quietly innovating on this technology for years, now, and the use cases they’ve developed could create whole new investment markets.

“When we looked at blockchain, we asked: is there a use case within Northern Trust that could benefit from this technology?” said Arijit Das, SVP of Digital Asset Innovation Technology at Northern Trust, in a recent meeting of the Chicago Payments Forum.  “That took us to private equity. It’s one of our core businesses, and we realized it has a lot of manual processes that aren’t very efficient in terms of operations and exchange of data. We thought it would be an ideal use case for applying blockchain.”

And now, following studies and time in development since those days in 2017, an application serving just those needs is now live within the bank.

“It’s done live transactions, it’s done capital calls on the blockchain – it’s nothing to do with cryptocurrency at all, but it’s the beginning of what the industry is now calling digital assets,” Das said.

That term – digital assets – references a growing trend among innovators working to make serious moves within the space. Assets in general are increasingly following a trajectory that is well represented in distributed ledger technologies (DLTs). DLTs come with certain advantages and operational efficiencies; they can embed logic and behavior within the representation of assets themselves, and they often are private networks that limit access to known and trusted partners.

That’s a big advantage over the current space for assets. For example, take today’s bonds. They are represented digitally somewhere as an entry in a database, but that information is static, and making that bond payout is reliant on external systems. With digital assets, that bond can instead be represented as a token with a host of preordained behaviors that have already been recorded, and that opens up a lot of possibilities.

And while these digital assets may push blockchain into the background of the transaction, totally invisible to end users, they represent a potential revolution in the way payments in general work; a shift that’s finally beginning to be met with real regulatory moves from the U.S. government.

“Banks are now allowed to have customers in this space – unlike with marijuana, where that is not true in many places – the OCC has permitted it,” said Jay Schulman, Principal of Blockchain and Digital Assets at RSM US LLP.  “This little piece will have a dramatic effect on the industry because there’s a lot of startups that exited when they couldn’t find a banking relationship. I’m not saying the floodwaters are rushing in and every bank’s going to go do it, but there’s plenty openly working with crypto companies saying if the OCC backs it, we’ll do it.”

This is a big change for banks. Recent moves from Brian Brooks, Acting Comptroller of the OCC, suggest a new payments charter is being written for the fall of 2020 that would lay out a state money transmission license aimed at cryptocurrency.

And while more conservative – or cautiously innovative – entities like Northern Trust are unlikely to jump into cryptocurrency anytime soon, this increasing embrace of a digital model is allowing them to get into the new marketplace with both feet.

“We’ve recently been working with a startup in Singapore,” Das said. “They’re an exchange that trades full sale bonds on blockchain as fractions. That allows wholesale bonds to be bought and sold by retail investors. Say a Singapore telecom offers a billion-dollar bond. You can’t go offer $2,000 there to get involved in that. If you fractionalize it on the blockchain, however, you can buy those smaller fractionalized pieces, which widens the pool of potential investors.”

And this partnership has already moved beyond the hypothetical. A recent announcement in BusinessWire noted the completion of the very first live trade of a fractionalized blockchain-based bond from Northern Trust’s partnership with Singapore startup BondEvalue on August 11.

It’s the sort of product that could make a big difference in the Asian market, where it’s harder to buy into a bond fund than it would be in the U.S. And according to Das, it’s just the tip of the iceberg.

“There will be new products that will evolve that don’t exist today,” Das said. “Some clients may have bond value and need to take a traditional asset and represent that as a token. That’s our service, right? They can then fractionalize that and provide it. We help them do that.

“Others may have illiquid assets that can’t easily be brought to market. For example – hypothetically – say there’s an art museum that wants to make that asset liquid and trade it, we could help them tokenize it and trade it. Others may need native issuance of tokens and want it part of their overall custody group, we can do that as well.”

This may not yet represent a “chasm crossing” application for digital assets – that critical requirement for mainstream product success. But as the use case becomes more important than the technology, it’s moving closer to closing the gap.

Collin Canright