This report focuses on the exploration, adoption, and application of blockchain technology, particularly public blockchains and DeFi, by mainstream financial institutions.

Written by: Ryan Chen, Louis Wan (Spinach Spinach)

This article is co-authored by Ample FinTech and DigiFT

Author's Foreword:

Ryan Chen, Head of Research and Innovation, DigiFT

At the end of 2023, we wrote a research report on Real World Assets (RWA). At that time, the main market participants were still Web3 natives, with low institutional participation. However, 2024 marks a turning point, as top global institutions like BlackRock, UBS, and Franklin Templeton have entered the market. As industry practitioners, we have witnessed the intensification of competition and the beginning of the convergence of two different forces.

This phenomenon reflects the gradual integration of Web2 and Web3, with the exchange of data, capital, and human resources becoming increasingly diverse and frequent. As the regulatory environment of the crypto market continues to evolve, returning to the core principles of finance, we believe that RWA will become a key direction for future development. Through faster settlement systems, more transparent markets, and collaborative databases, blockchain technology will ultimately become mainstream, enhancing the efficiency of capital markets and bringing tangible value to the real world.

Louis Wan (Spinach Spinach), Head of Research, Ample Fintech

Innovations such as distributed ledger technology (DLT) and tokenization are significantly enhancing the efficiency of today’s financial systems. These advancements promise not only to simplify transaction processes but also to facilitate new forms of financial interactions that are more transparent, inclusive, and secure. By reducing reliance on intermediaries, speeding up settlement times, and embedding compliance measures through programmability, these technologies demonstrate the potential to reshape the foundations of the financial industry.

Today, we are witnessing an unprecedented level of public-private collaboration. Clearly, the drive for the tokenization of Real World Assets (RWA) is no longer solely from Web3 industry participants but is a collective effort from governments, central banks, financial institutions, and international organizations. Ample FinTech is fortunate to collaborate with several central banks to explore the practical applications of tokenized currencies. Ample FinTech will continue to explore practical solutions based on digital currencies and smart contract applications, aiming to bring the inclusive value of programmable payments and finance to more people.

Executive Summary

1. In recent months, the tokenization field has moved beyond proof of concept (PoC) into the commercialization stage, with leading financial institutions playing a leading role.

2. Although the global tokenization market's regulatory landscape remains unclear, major financial centers are developing more comprehensive frameworks, with some regions becoming more welcoming to tokenization efforts.

3. This year, financial institutions such as BlackRock, UBS, and Franklin Templeton have launched tokenization projects on public blockchains, competing with Web3 native initiatives.

4. Market opportunities, infrastructure maturity, and the licensing of innovative startups are key drivers for institutional adoption of public blockchains.

5. Private sector financial institutions are leading in asset tokenization, while coordination between the private and public sectors is increasing in currency tokenization.

6. With the growing demand for cross-border payments, the global economy has become aware of the inefficiencies of existing cross-border payment systems. High costs, slow speeds, and a lack of transparency are increasingly becoming challenges that need to be addressed. The G20 has developed a roadmap for cross-border payments to improve the efficiency, transparency, and accessibility of payment systems. Currency tokenization has become one of the key ways to enhance payment efficiency and reduce costs.

7. The tokenization of currency not only brings cost reductions and efficiency improvements to payment systems but also achieves programmability and automation through smart contracts. This technology can provide more innovative, transparent, and speedy solutions for complex financial transactions, with the global public sector launching related projects on a large scale.

Introduction: Beyond Speculation

Finance is built on trust, including trust in infrastructure, trust in companies, and trust in people. The emergence of cryptocurrencies and blockchain technology aims to construct a more efficient and transparent financial world, with a globally trusted ledger as its infrastructure. Looking back at Bitcoin's initial design, its goal was to establish a peer-to-peer payment system, while Ethereum aimed to be a smart contract platform for decentralized applications.

Bitcoin[1]:

• Focused on creating a decentralized digital currency for secure, low-cost peer-to-peer transactions.

• Aimed to eliminate financial intermediaries, promote financial inclusion, and establish a trustless financial system.

Ethereum[2]:

• Expanded the application of blockchain to smart contracts and decentralized applications.

• Aimed to revolutionize the financial system through programmable currencies, asset tokenization, and decentralized finance (DeFi), achieving automated, transparent, and secure financial transactions and services.

Both Bitcoin and Ethereum leverage blockchain technology to improve traditional financial systems, promoting decentralization, transparency, and efficiency.

In recent years, the native cryptocurrency market has rapidly evolved, experiencing various conceptual cycles such as ICOs, DeFi, NFTs, and GameFi. Major innovations have focused on asset issuance and trading models, but the impact on the real world has been limited. As the market develops, relying solely on crypto-native assets clearly does not meet investors' needs. Moreover, the advantages of new financial technologies allow various application scenarios for innovators to explore further. We can clearly categorize this technology-driven digital asset evolution into three stages:

• Stage One, Crypto-Native Assets, 2010 ~ 2019:

For example, DeFi tokens, meme coins, and native tokens of blockchains. These assets are essentially issued and traded on public blockchains, enjoying all the advantages and disadvantages of blockchain technology.

• Stage Two, Digital Native Assets, 2020 ~ 2023:

For example, NFTs and GameFi tokens. These assets are connected to digital services or applications.

• Stage Three, Digital Twins, 2024 ~ Present:

Referring to real-world assets represented by ledger entries on the blockchain, such as gold tokens and U.S. Treasury bond tokens. In this stage, tokens are data entries on a public blockchain-driven ledger, connected to off-chain entities or assets to achieve faster settlement, real-time transparency, and process automation on the ledger.

In the first two stages, Web3 resembled a casino, with hot money flooding the market, leading to significant price volatility for assets like meme coins. The adoption of Web3 needs to transcend the casino mentality, and it is important to distinguish between "cryptocurrency" and "blockchain technology." As we enter the third stage, the challenges we face primarily stem from the ambiguity of the legal and regulatory environment, rather than technical issues, which affect the transition of the real world to the Web3 era.

There is significant room for improvement and innovation in traditional financial markets, which can be achieved through crypto and blockchain technology. For example, according to estimates by the Bank for International Settlements (BIS)[3], from 2003 to 2020, participants in the U.S. Federal Reserve's funds transfer system used an average of $630 billion in intraday liquidity daily, with peak values approaching $1 trillion. In the euro system, the average and peak values of intraday liquidity were $443 billion and $800 billion, respectively. Over a sample of nine jurisdictions and a 17-year time span, participants used an average of 15% of the total daily payment value or 2.8% of GDP to meet intraday liquidity needs. These enormous figures highlight the important role of intraday liquidity in maintaining financial stability. The cost of providing this liquidity-related service is approximately $600 million annually, primarily to meet the demand for real-time payments, manage timing mismatches, reduce settlement risks, and comply with regulatory requirements. The reason for this arrangement is mainly the inefficiency of widely used clearing and settlement infrastructure, where simple transactions can take days to complete.

Blockchain-based clearing and settlement systems can reduce settlement times to T+0[4] or even achieve real-time settlement, significantly decreasing the demand for intraday liquidity and lowering settlement risks.

In 2024, we see more institutions participating in this field, not only conducting proof of concepts (PoC) but also moving towards more commercial directions. In the adoption of blockchain technology and tokenization, there are primarily two areas: currency tokenization and asset tokenization. In terms of asset tokenization, several important milestones occurred in 2024. Mainstream financial institutions made significant progress in the public blockchain space. From their perspective, they focus on blockchain technology as a new innovative ledger for recording ownership and reconciliation.

In terms of currency tokenization, we have seen not only the adoption of stablecoins in the crypto market but also other meaningful use cases being explored, such as purpose-driven currencies and programmable currencies.

This report focuses on the exploration, adoption, and application of blockchain technology, particularly public blockchains and decentralized finance (DeFi), by mainstream financial institutions, and is divided into two parts: asset tokenization and currency tokenization. Most of the mentioned cases are still in the initial stages, but we can clearly see how institutions differentiate between cryptocurrencies and blockchain technology, as well as the emerging trends and application paths of these technologies.

Why Choose Tokenization on Permissionless Blockchains In the rapidly evolving digital technology environment, permissionless blockchains have emerged as a revolutionary concept, challenging the notion of traditional centralized systems and paving the way for a new era of decentralized applications. Permissionless blockchains are essentially a type of distributed ledger technology that allows anyone to participate in the network without the approval of a central authority. Bitcoin and Ethereum are the most well-known examples of permissionless blockchains, attracting the attention of global tech experts, investors, and dreamers.

The key features defining permissionless blockchains are their open access and decentralized nature. These characteristics distinguish them from traditional centralized systems and permissioned blockchains with restricted participation.

When we talk about permissionless blockchains, people may think of cryptocurrencies, which are one application case of permissionless blockchains, as well as decentralized finance (DeFi) applications. Essentially, permissionless blockchains are an open shared database, and we can leverage these technologies to achieve efficiency. Mainstream financial institutions have realized that cryptocurrencies can settle atomically in minutes, and this feature is likely applicable to other assets represented in token form. Some benefits we can achieve through these technologies include:

• Higher Liquidity and Faster Settlement

o In traditional markets, standard T+2 or longer settlement cycles have been the norm, primarily due to the transfer of settlement risk between different counterparties. This settlement delay ties up capital and increases counterparty risk.

o To shorten settlement times, a good practice is to open accounts with counterparties at the same bank or custodian. This way, asset transfers between you and the counterparty can be conducted through internal book transfers at the bank, allowing for almost immediate settlement. However, opening bank accounts is not easy, especially for financial institutions. In contrast, blockchain-based systems can reduce transaction settlement times to T+0 or even a few seconds, making it nearly instantaneous.

• Convenient and Low-Barrier Accessibility

o This open architecture is redefining accessibility, a goal that traditional systems have long sought to achieve. Anyone with a smartphone can access a full suite of financial services on-chain, which is exactly the promise we are witnessing. Millions of people excluded from traditional finance are finding new economic opportunities through financial services on public blockchains. Small businesses can obtain funding without going through endless cumbersome procedures. Individuals from various backgrounds can invest and receive meaningful returns without needing a perfect credit score or a fancy suit.

• Automation and Trustless Operations

o One significant advantage of permissionless blockchains is their decentralized structure. Unlike traditional systems where "power" and "control" are concentrated in a single entity, permissionless blockchains distribute decision-making across the entire network.

o As a result, it is difficult for any single entity to manipulate or cripple the system, as there is no "central" weakness. This creates a trustless environment where participants do not need to rely on the trust of a central authority. Instead, trust is embedded in the system itself, governed by transparent rules and cryptographic proofs.

o Smart contracts are a prime example of this trustless environment; they are self-executing contracts with the terms of the agreement directly written into code. These contracts automatically execute the terms of the agreement, reducing the need for intermediaries and minimizing the potential for disputes.

• Global Open Participation

o The open nature of permissionless blockchains allows these networks to operate around the clock, enabling cross-border transactions without the constraints of traditional banking hours or international transfer limitations. This global accessibility has the potential to revolutionize remittances and cross-border payments, making them faster and more cost-effective.

o For the unbanked and financially underserved populations worldwide, these systems provide a way to participate in the global economy without needing access to traditional banking infrastructure. All that is required is an internet connection and a device capable of running a wallet application.

• Transparency and Real-Time Monitoring

o Every transaction on the network is recorded on a public ledger visible to all participants. Compared to traditional financial systems, where transaction records are not easily accessible, this level of transaction transparency far exceeds that of traditional systems. This public nature increases trust among users, as anyone can verify transactions and the overall state of the network. At the same time, it allows real-time access to transaction data for different counterparties for monitoring and automation.

While permissionless blockchain technology holds great promise, it also faces certain limitations and obstacles that need to be overcome, as with any emerging innovation. With the development of decentralized finance (DeFi) platforms and the follow-up from traditional financial institutions, we are witnessing a dynamic financial ecosystem filled with potential and challenges. Understanding these challenges is crucial for risk mitigation and fully realizing the potential of permissionless blockchains:

• Security and Privacy Issues

o Permissionless blockchains may face certain risks. For example, security risks such as 51% attacks (in systems using proof-of-work and proof-of-stake consensus mechanisms).

o If smart contracts are not properly audited and tested, they may also introduce security risks.

o In terms of privacy, transparency is a double-edged sword. All transactions on public blockchains are visible to everyone, which can pose problems for individuals and businesses that require confidentiality.

• Regulatory Uncertainty

o The decentralized nature of permissionless blockchains necessitates joint regulation across different jurisdictions, presenting significant challenges for regulators. Many governments are still struggling to determine how to classify and regulate cryptocurrencies and blockchain-based assets. We will delve deeper into regulatory details in the next section.

o The existence of crypto regulations aims to create stability, protect investors, and prevent illegal activities such as money laundering or fraud. Given the high volatility of the crypto market and the largely decentralized nature of it, regulations help reduce investor risk and ensure that exchanges and other crypto businesses operate transparently and fairly.

o Furthermore, regulations aim to integrate cryptocurrencies into the existing financial system while maintaining oversight, reducing opportunities for abuse, and promoting broader adoption by enhancing trust in the system. The ever-changing nature of crypto regulations makes them difficult to predict, as each country and region has different views on cryptocurrencies.

• Market Volatility

o Cryptocurrencies, often the native assets of permissionless blockchains, are known for their extreme price volatility; even the largest market cap asset, Bitcoin, can fluctuate by 20% in a single day. Tokenized assets coexisting with volatile cryptocurrencies may transmit risks to the mainstream financial system, raising concerns for the U.S. Securities and Exchange Commission. For example, a large trader might use treasury bond tokens as collateral, but due to market volatility, they may need to liquidate. This could lead to a sell-off of the underlying assets in mainstream financial markets.

• Complex User Experience

o Despite the many potential benefits, interacting with permissionless blockchains remains challenging for many users. Setting up wallets, managing private keys, and interacting with decentralized applications can be daunting for non-technical users.

o The irreversibility of blockchain transactions means that the cost of user errors can be high. Sending funds to the wrong address or losing access to a wallet can result in permanent loss of assets. This high-risk environment can create pressure for users, hindering mass adoption.

• Lack of Accountability Mechanisms

o Permissionless blockchains pose significant challenges for anti-money laundering (AML) and know your customer (KYC) compliance, which are cornerstones of financial regulation. Unlike traditional finance (TradFi), where intermediaries act as gatekeepers, these open networks allow anyone to transact without prior approval or identity verification. While this anonymity is appealing to privacy advocates, it also creates an environment that could foster illegal activities. The lack of centralized oversight makes it difficult to trace the flow of funds or identify parties in suspicious transactions, complicating efforts to combat financial crime.

o The rise of decentralized finance (DeFi) on permissionless blockchains further exacerbates these concerns. DeFi platforms provide financial services without the safeguards typically present in TradFi, such as identity checks or transaction monitoring. While this offers financial access to underserved populations, it also creates opportunities for bad actors to exploit the system. For instance, money launderers could use complex DeFi transaction chains to obscure the source of funds, making it difficult for law enforcement to trace the money flow. As regulators work to address these issues, balancing innovation with security remains a key challenge in the evolving landscape of blockchain technology.

• Difficulties in Upgrading

o Upgrading permissionless blockchain protocols is a complex and high-risk process. Unlike centralized systems where upgrades can be implemented unilaterally, changes to blockchain protocols require consensus among diverse and decentralized participants.

o The difficulty of implementing upgrades can lead to technological stagnation, where known issues or limitations remain unresolved because the community cannot reach consensus on how to address them. This also makes it challenging to respond quickly to newly discovered vulnerabilities or changes in the technological environment.

Permissionless blockchains represent a breakthrough technology with the potential to improve our digital lives and revolutionize the future of investment. Their advantages over traditional centralized systems offer significant benefits. The innovative potential they unleash in areas such as decentralized finance and new economic models is exciting. However, these systems also face significant challenges and risks that pose substantial barriers to widespread adoption.

Ultimately, the future of permissionless blockchains may undergo a process of evolution and improvement. While they may not completely replace traditional systems in the short term, they have already proven their potential to complement and enhance existing financial and technological infrastructures.

As technology matures and solutions to current challenges emerge, we can expect permissionless blockchain technology to achieve broader integration across various sectors of the economy and society.

This integration will take time and require careful consideration of the trade-offs between decentralization, efficiency, security, and user experience. When comparing decentralized finance with traditional finance, it is important to consider the evolution of traditional finance. The internet or online banking did not happen overnight; the online brokerage and trading platforms we know today evolved over many years, facing numerous regulatory issues. Large banks or participants that entered the market early grew alongside the evolution of traditional finance and ultimately succeeded in the financial industry. This mindset applies equally to decentralized finance and its integration with the traditional financial ecosystem via blockchain to achieve widespread adoption of decentralized finance.

Changes in Legal and Regulatory Trends - Regulatory Frameworks Across Jurisdictions

The legal environment surrounding the tokenization of Real World Assets (RWA) globally is fragmented. Legal systems need to establish clear standards to classify tokens that are subject to securities laws. Tokens can serve as substitutes for traditional securities, in which case the rules of securities law need to be adjusted and applied. Extending securities laws to tokens that do not fall under the definition of securities could lead to adverse outcomes and stifle economic and/or technological innovation. Some jurisdictions adopt traditional approaches, distinguishing between security tokens and cryptocurrencies according to existing securities laws.

With the rapid development of decentralized finance (DeFi) and tokenization, global regulators are continuously refining the legal framework for digital assets and related financial activities. This trend reflects not only the growing demand from market participants but also the government's emphasis on maintaining financial stability and protecting investors' rights. As the cryptocurrency market thrives and tokenization technology is applied, different regulatory bodies have varying considerations and requirements regarding cryptocurrency-based assets and tokenization technology. We will focus on several major jurisdictions and their regulatory stances, including the United States, Hong Kong, Singapore, the United Arab Emirates, the British Virgin Islands, and the European Union.

United States

Regulatory Bodies: Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Financial Crimes Enforcement Network (FinCEN).

Crypto Regulation:

• Security Tokens: Regulated by the SEC under U.S. securities laws. If a token is classified as a security under the Howey Test, it must comply with registration requirements, exemptions (e.g., Regulation D, Regulation S), disclosure obligations, and conduct standards.

• Commodity Tokens: Such as Bitcoin (BTC) and Ethereum (ETH), classified as commodities and regulated by the CFTC.

• Payment Tokens (Cryptocurrencies): Subject to FinCEN's anti-money laundering/anti-terrorist financing (AML/CFT) regulations if used for currency transfer services.

Tokenization:

• Tokenized Securities: Treated as traditional securities and must comply with all SEC regulations regarding issuance, trading, and custody.

• Digital Asset Custodians: Must register and comply with SEC and CFTC regulations regarding digital asset custody.

Hong Kong

Regulatory Bodies: Securities and Futures Commission (SFC) and Hong Kong Monetary Authority (HKMA).

Crypto Regulation:

• The SFC regulates cryptocurrencies that qualify as securities or futures contracts under the Securities and Futures Ordinance (SFO).

• Virtual Asset Trading Platforms: Must apply for licenses under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and comply with anti-money laundering (AML) and counter-terrorist financing (CTF) requirements.

• Regulatory Sandbox: Allows crypto platforms to operate under strict supervision to ensure compliance with regulatory standards.

Tokenization:

• Security Tokens: Considered securities under the SFO, subject to securities laws, including intermediary licensing requirements, prospectus requirements, and compliance with conduct standards.

• Stablecoins: The HKMA is developing a regulatory framework that treats stablecoins as Stored Value Facilities (SVFs), requiring licenses and prudential requirements similar to those for payment providers.

Singapore

Regulatory Body: Monetary Authority of Singapore (MAS).

Crypto Regulation:

• Payment Tokens: Also known as Digital Payment Tokens (DPT), regulated under the Payment Services Act (PSA). Crypto exchanges and wallet providers must obtain licenses and comply with anti-money laundering (AML) and counter-terrorism financing (CTF) requirements.

• Security Tokens: Regulated under the Securities and Futures Act (SFA) if they qualify as securities or capital market products. Issuers must comply with prospectus requirements and obtain licenses unless exemptions apply.

Tokenization:

• Utility Tokens: Generally not regulated under the SFA unless they fall into specific categories that trigger regulation. They must comply with AML/CFT and consumer protection laws.

• MAS supports Security Token Offerings (STOs) and has established a framework to facilitate the issuance of tokenized securities under the SFA, providing guidance for regulated entities conducting STOs.

United Arab Emirates

Regulatory Bodies: Dubai Financial Services Authority (DFSA), Abu Dhabi Global Market (ADGM) Financial Services Regulatory Authority (FSRA), and Securities and Commodities Authority (SCA).

Crypto Regulation:

• Security Tokens: Regulated under the financial market regulations of ADGM and DFSA. Issuers and intermediaries must obtain licenses, comply with conduct standards, and adhere to anti-money laundering (AML) and counter-terrorism financing (CTF) requirements.

• Virtual Asset Service Providers (VASPs): Must register with the respective regulatory authorities and comply with specific requirements (e.g., ADGM's virtual asset framework and DFSA's virtual asset regulations).

Tokenization:

• Fiat-Backed Tokens (FRTs): Regulated under the stablecoin and asset-backed token framework proposed by ADGM. These tokens must be fully backed by high-quality, liquid assets.

• The UAE encourages Security Token Offerings (STOs) within its financial free zones (ADGM and DIFC) and has established clear compliance, investor protection, and issuance rules.

British Virgin Islands

Regulatory Body: BVI Financial Services Commission (BVI FSC)

Crypto Regulation:

• Security Tokens: Regulated under the BVI Securities and Investment Business Act 2010 (SIBA). Issuers and intermediaries must obtain licenses, comply with conduct standards, and adhere to anti-money laundering (AML) and counter-terrorism financing (CTF) requirements.

• Virtual Asset Service Providers (VASPs): If the issuer meets the definition of VASPs, they must obtain a license under the VASPs Act. Additionally, the BVI FSC has published guidance on the registration application for virtual asset service providers ("VASPs Registration Guidance") and guidelines for anti-money laundering, counter-terrorism financing, and proliferation financing for virtual asset service providers.

Tokenization:

• Security Tokens: Tokens that constitute securities or other financial instruments must comply with various regulations, including (but not limited to) the VASPs Act, the Securities and Investment Business Act 2010, and the Financing and Money Services Act 2009.

European Union

Regulatory Bodies: European Securities and Markets Authority (ESMA), European Banking Authority (EBA), and national regulatory authorities.

Crypto Regulation:

• The EU has established the Markets in Crypto-Assets Regulation (MiCA), providing a comprehensive regulatory framework for crypto assets across member states.

• Asset-Referenced Tokens (ARTs) and Electronic Money Tokens (EMTs) must comply with requirements related to authorization, reserve management, capital adequacy, and disclosure obligations.

• Crypto Asset Service Providers (CASPs): Must obtain licenses and comply with anti-money laundering (AML)/counter-terrorism financing (CTF) and market conduct standards under MiCA.

Tokenization:

• Security Tokens: If they qualify as financial instruments, such as transferable securities, they are regulated under the existing Markets in Financial Instruments Directive (MiFID II).

• MiCA also addresses utility tokens and provides clear guidance on their issuance and trading requirements, while utility tokens may not fall under traditional securities regulation.

Summary

Each jurisdiction has its unique approach to regulating cryptocurrencies and asset tokenization. In general:

• Hong Kong and Singapore focus on a balanced approach, encouraging innovation while ensuring investor protection and market integrity.

• The regulatory environment in the United States is more fragmented, with multiple agencies overseeing different aspects of crypto assets.

• The UAE offers a tailored regulatory framework within its financial free zones, promoting a regulated environment for digital assets and tokenization.

• The British Virgin Islands has a clear system that relies on existing securities laws to manage security tokens and has the VASPs Act to govern virtual asset services.

• The EU, through MiCA, is moving towards a unified regulatory framework across member states, focusing on consumer protection, market integrity, and financial stability.

Asset Tokenization: Institutional Entry into Web3

Decentralized Finance (DeFi) is rapidly gaining attention for its potential to revolutionize institutional financial services through blockchain technology and smart contracts. Proponents of DeFi envision a new financial paradigm characterized by rapid settlement, efficiency, composability, and the features of open and transparent networks.

Despite the optimistic outlook, DeFi has been cautiously progressing in the development of regulated financial activities, primarily due to the evolving macroeconomic and regulatory environment, as well as uncertainties in technological development. To date, most institutional DeFi initiatives remain in proof-of-concept or sandbox environments. However, successful implementations are beginning to emerge, and the integration of DeFi with digital assets and tokenization is expected to accelerate in the next one to three years.

Financial institutions have been preparing for years, recognizing the transformative potential of DeFi. As technology and regulatory frameworks mature, the integration of DeFi with institutional finance is expected to unlock new levels of efficiency, transparency, and innovation. In this section, we will focus on the primary component of assets—securities—to investigate the exploration of financial institutions in this area.

From Concept to Reality: Mainstream Thoughts on Blockchain and Tokenization

From an institutional perspective, tokenization is a form of data entry that offers certain advantages over traditional ledger entries, while blockchain serves as the ledger for recording ownership and facilitating transactions.

As blockchain technology and the crypto industry continue to evolve, the term "Real World Assets" (RWA) has become increasingly prevalent. RWA encompasses a wide range of assets, from the tokenization of physical assets to mainstream financial instruments, including those related to environmental, social, and governance (ESG) standards. In Web3, the first widely adopted category of real-world assets is stablecoins, which we will discuss in the next section. Following closely are products related to U.S. Treasury bonds, as they are widely accepted as safe assets and more standardized. In recent months, we have seen rapid growth in on-chain U.S. Treasury bonds and money market funds, with total value increasing from approximately $100 million at the beginning of 2023 to $2.21 billion now.

Tokenization: A Milestone for Mainstream Finance in 2024

Ethereum, Bitcoin, and other public blockchains have established an open financial system that allows for the free trading and liquidity of assets. This open system has brought numerous financial innovations but has also posed significant challenges for anti-money laundering (AML) and counter-terrorism financing (CFT) efforts due to its anonymous and open nature. Mainstream financial institutions have invested considerable time and effort in researching and exploring solutions, gradually beginning to find optimal solutions.

To address the aforementioned issues, financial institutions have developed best practices to enable regulators to feel more comfortable allowing this liquidity to occur. Some examples include on-chain anti-money laundering screening, token whitelisting, and blacklisting controls.

These practices facilitate the entry of mainstream financial institutions into the DeFi space. The year 2024 appears to be a turning point, with one significant milestone being the launch of the BUIDL token on Ethereum by BlackRock and Securitize[5], followed by Franklin Templeton's tokenization[6] across multiple blockchains, and the issuance of U.S. Treasury bond funds in collaboration with UBS and DigiFT[7].

Factors driving this progress include the efficiency of on-chain operations and market opportunities, all thanks to the emergence of compliant on-chain market participants. Securitize, as an SEC-approved transfer agent, utilizes public blockchains as its infrastructure, enabling the registration and recording of asset ownership on the blockchain. This allows Securitize to act as a distributor for BlackRock, facilitating the tokenization and distribution of assets on the Ethereum blockchain, embedding BlackRock's BUIDL token into the DeFi and Web3 space.

Previously, Franklin Templeton also recorded using blockchains like Polygon and Stellar but primarily relied on its traditional ledger entry forms, treating public blockchains as secondary ledgers. However, BlackRock has adopted public blockchains as its primary ledger, allowing tokens to be directly transferred on-chain and making ownership transfers effective. Shortly after BlackRock launched BUIDL, Franklin Templeton also released its token transfer functionality, even supporting token transfers on other blockchains such as Solana, Avalanche, Aptos, and Arbitrum to expand its customer base.

Structure of Tokenization

Although similar funds are already common in the Web2 market, achieving tokenization still faces many challenges, as the operation of funds involves dozens of relevant parties and key processes, as illustrated in the diagram below.

The process primarily consists of three main components:

• Fund Management: Fund managers will open accounts with institutions including banks, exchanges, brokers, and custodians to invest and manage assets according to their strategies.

• Fund Administration: Involves tasks such as net asset value (NAV) calculation, accounting and bookkeeping, investor services, compliance reporting, fee management, and audit support.

• Fund Distribution: Distribution channels act as a bridge between investment funds and investors, providing the infrastructure for sales, marketing, and delivery of funds. In Web3, distribution channels will allocate funds in token format to the Web3 ecosystem.

In the tokenization process, fund distribution is the most directly relevant. However, to complete distribution, activities such as KYC linking, anti-money laundering (AML) checks, data updates, dividend payments, and allocations are closely connected with other stages.

In the chart above, we can divide it into on-chain and off-chain parts. The processes on the right side are all related to on-chain, including:

On-Chain Anti-Money Laundering and KYC

• Linking customer wallet addresses with off-chain KYC and adding addresses to the whitelist.

Ownership Records

• Tokens represent ownership of the fund, guaranteed by legal contracts. Thus, on-chain transfers to another address have legal effect.

Token Contract Design

• Token contracts will be managed and controlled by fund managers, featuring role settings, forced transfers, minting or burning of tokens, whitelist and blacklist functionalities, etc.

• Distributors will be able to add or remove from the whitelist and mint or burn fund tokens.

• End investors typically only have the right to transfer tokens (to another whitelisted address or redeem contracts).

On-Chain Data Availability

• This process usually involves an oracle that publishes off-chain data (such as the NAV of fund shares) on-chain.

As shown above, institutional asset tokenization involves multiple participants, requiring collaborative efforts and is not straightforward. Some institutions have streamlined this process and successfully launched their fund tokens in 2024. We view 2024 as a critical turning point.

2024: Major Milestones

BlackRock and Securitize Launch BUIDL

BlackRock is the first major financial institution to directly adopt fund tokenization, achieving this through a partnership with Securitize.

The fund is named BUIDL (BlackRock USD Institutional Digital Liquidity), issued by BlackRock's entity in the British Virgin Islands. This fund is a sub-fund that invests in a master fund managed by BlackRock Asset Management. Securitize, as an SEC-approved transfer agent, serves as the tokenization platform, transfer agent, and exclusive distributor for the fund.

The fund token represents shares of the fund and can be transferred on-chain between whitelisted addresses. With this transferability, the issuer of the stablecoin USDC, Circle, added a real-time redemption smart contract for BUIDL, providing $100 million in USDC liquidity. Investors can transfer BUIDL tokens into the smart contract and receive USDC liquidity after confirming the transaction on the Ethereum blockchain. This functionality demonstrates the rapid and efficient settlement advantages of public blockchain technology.

To invest in the fund, investors must be qualified purchasers (QP), with a minimum investment of $5 million. The fund adopts a share class structure, with each BUIDL fund share token always equal to $1, and monthly distributions of earnings in the form of BUIDL token airdrops.

Franklin Templeton Launches FOBXX on Multi-Chain

It is widely believed that transfers on public blockchains have legal effect. However, this is not always the case. In certain jurisdictions, the law needs to reconcile the general provisions for the transfer of intangible assets with the actual operation of blockchain technology. This will be achieved by integrating on-chain transfers into universally applicable rules. For Franklin Templeton, its fund tokenization project underwent this process.

In 2021, Franklin Templeton tokenized its U.S. Treasury bond fund on the Polygon and Stella blockchains, using the tokenization platform Benji, which provides wallet and custody solutions for retail clients. The fund is open to U.S. retail investors.

Initially, Franklin Templeton's Benji tokens could not be directly transferred on-chain. Benji only used blockchains like Polygon and Stella as auxiliary ledgers, still relying on its own centralized system.

Shortly after BlackRock launched BUIDL, they enabled native on-chain transfer functionality and supported other blockchains such as Ethereum, Arbitrum, Aptos, and Avalanche C Chain.

UBS Partners with DigiFT to Distribute Tokenized Funds

This project was initially a pilot under the Monetary Authority of Singapore (MAS) "Project Guardian." In this project, UBS established internal capabilities for tokenization on public blockchains. Recently, UBS partnered with DigiFT and another distributor (SBI) for token distribution, with DigiFT serving as the DeFi distributor for U.S. dollar money market fund tokens.

The fund token represents shares of a Variable Capital Company (VCC), a widely used fund structure in Singapore known for its flexibility.

The collaboration with DigiFT allows UBS's money market fund tokens to attract a broader customer base in both Web2 and Web3, with DigiFT's trading smart contracts providing real-time redemption capabilities, enabling all DigiFT users to provide liquidity for the contract to meet real-time redemption demands and achieve seamless interaction with the DeFi ecosystem.

DTCC and Chainlink Collaborate on Smart NAV Pilot

DTCC and Chainlink announced the successful completion of a smart NAV pilot in 2024[9]. The program aims to tokenize mutual funds and utilize Chainlink's blockchain technology to automate the distribution of net asset value (NAV) data. NAV is the daily valuation of mutual fund assets, and traditionally, the process of distributing NAV data has been manual, error-prone, and slow. The smart NAV pilot changes this by delivering on-chain NAV data on public and private blockchains using Chainlink's CCIP.

The pilot also involved key industry participants such as JPMorgan, BNY Mellon, and Franklin Templeton, who tested how blockchain-based automation can enhance transparency and efficiency in financial operations.

Key Achievements of the Pilot Include:

• Interoperability: Chainlink's CCIP ensures that NAV data can be seamlessly distributed across different blockchain networks, avoiding data silos and improving accessibility and scalability. This cross-chain functionality is crucial for the future of tokenization, as it allows traditional financial markets to interact securely with decentralized platforms.

• Real-Time Data Access: By putting NAV data on-chain, financial institutions gain real-time pricing information, enhancing market efficiency. This not only accelerates decision-making but also paves the way for the tokenization of mutual funds, making them easier to trade and manage.

• Operational Efficiency Improvements: The pilot automated several aspects of NAV data distribution, reducing manual errors and operational costs. The ability to deliver historical data on-chain also enhances transparency and record-keeping, which is critical.

The collaboration between Chainlink and DTCC represents a forward-thinking approach aimed at integrating blockchain technology with traditional finance. By automating the transmission of key financial metrics (such as NAV data), this collaboration showcases the potential for achieving greater efficiency, transparency, and innovation in financial markets. With the participation of major financial players like JPMorgan, BNY Mellon, and Franklin Templeton, the smart NAV pilot clearly indicates the growing interest of institutions in blockchain-based solutions.

Post-Tokenization—What Are the Use Cases?

Why are these mainstream financial institutions focusing on tokenization? If issuing tokens on public blockchains is merely for recording and maintaining asset ownership, then efficiency will not be improved. One of the direct benefits is access to a new market, thereby increasing their assets under management (AUM). The narrative of institutional DeFi is also an exploratory area, where there will be more use cases for tokenized assets that can genuinely address some pain points of the traditional financial system.

Institutional DeFi not only requires time to resolve business and technical issues but also needs to address legal and compliance challenges. DeFi participants are moving quickly. Beyond tokenization, DeFi participants are adding more use cases for the tokens issued by these institutions.

Real-Time Settlement Capability

Real-time settlement is an ideal scenario in capital markets; if settlement can be completed in a single atomic transaction, then we can reduce settlement risk to almost zero. However, in mainstream systems, only a small portion can achieve this. The barriers lie in the clearing, settlement, and reconciliation processes between different trading parties. These processes take time because each participant has its own ledger, and there is a lack of trust between them.

But on a public open ledger, real-time settlement becomes possible. After the launch of BlackRock BUIDL, Circle established a real-time redemption contract for any BUIDL holder, providing $100 million in USDC liquidity for instant redemptions[10]. They manage the BUIDL tokens received and replenish the liquidity pool as needed.

DigiFT has established an internal real-time redemption contract for asset token holders, allowing them to access USDC liquidity instantly, while in the background, smart contracts trigger normal redemptions to replenish the liquidity pool.

Stablecoin Reserve Assets

Compared to highly volatile cryptocurrencies, securities tokens such as Treasury bond fund tokens and money market fund tokens are more suitable as reserve assets for fiat-backed stablecoins.

Sky (formerly MakerDAO) is the first decentralized stablecoin to adopt off-chain assets, now using tokenized assets as its stablecoin reserves[11]. Recently, they launched the RWA Grand Prix, planning to allocate $1 billion in USDC to RWA tokens[12], with companies like UBS, BlackRock, and Franklin Templeton competing for this $1 billion allocation.

Other examples include Mountain Protocol's stablecoin USDm and Ethena's stablecoin UStb[13].

Asset Packaging and Fractionalization

In the financial supply chain, distributors act as channels that lower the entry barriers for specific assets and improve efficiency. One case of a distributor in Web3 is Ondo Finance, which serves as the distribution channel for BlackRock BUIDL, currently with a total locked value exceeding $200 million.

Ondo has packaged BUIDL into a fund token called OUSG, allowing access for U.S. professional investors. Unlike BUIDL, which requires a minimum subscription of $5 million, OUSG accepts a minimum of $5,000 and enables real-time USDC subscriptions and redemptions, thereby helping BUIDL broaden its audience.

Margin Collateral

In mainstream finance, safe and yield-generating assets, such as U.S. Treasury securities and corporate debt, are often used as high-liquidity collateral for margin trading and derivatives trading.

For example, CME accepts various assets as collateral, including bonds, funds, and other securities.

Currently, using short-term U.S. Treasury fund tokens or money market fund tokens as collateral, instead of stablecoins or cash, can offset the funding costs of margin trading.

In 2023, Binance collaborated with some banks supporting cryptocurrencies to provide U.S. Treasury securities as collateral for its institutional clients[15], but the entire system still relies on traditional trading venues, such as Sygnum Bank.

In Web3, institutions and cryptocurrency exchanges are more familiar with tokenized assets. With the emergence of highly liquid and secure assets like BUIDL, they are beginning to use tokenized assets as collateral for certain trading purposes. Due to the instant redemption liquidity, the clearing process will not become a barrier.

Brokers like FalconX[16] and Hidden Road Partners[17] are already developing such use cases to attract institutional investors.

Asset Tokenization—What’s Next?

As we move into 2024 and beyond, asset tokenization is expected to fundamentally change the financial landscape by unleashing unprecedented liquidity, efficiency, and accessibility. We can clearly see some emerging future trends.

The Web3-native tokenization ecosystem is gradually maturing. Traditional financial markets have matured, with participants in different roles. In 2024, we see some startups borrowing business models and turning to Web3, such as rating agencies (like Particula) and accounting firms (like Elven, The Network Firm).

In addition to U.S. Treasury securities, as U.S. interest rates begin to decline, Web3 investors are also showing interest in high-yield assets. These assets will compete with Web3-native yields to attract investment.

Tokenization platforms and distribution channels are also focusing on traditionally illiquid products, such as trade finance products and venture capital funds. In this process, traditionally illiquid markets will also be democratized.

Compliance and licensing are also major trends, as we see Web3 companies obtaining licenses in friendly jurisdictions like the UAE and the EU. With the emergence of compliant participants in the ecosystem, mainstream institutions can also collaborate with them to explore new market opportunities.

As institutions adapt to Web3 and blockchain infrastructure, on-chain liquidity and real-time settlement will also become a reality on a large scale, with the settlement process gradually migrating on-chain.

Currency Tokenization

As the global economy continues to digitize, the currency system stands on the brink of another significant transformation. From dematerialization to digitization, and now to tokenization, the form and function of currency are undergoing profound evolution. In recent years, we have seen how the tokenization of real-world assets (RWA) has made asset management and financial services more efficient, with mainstream financial institutions like BlackRock and Franklin Templeton actively exploring the application scenarios of tokenization. However, in addition to asset tokenization, currency tokenization is also gradually becoming a major trend of significant attention, showcasing its immense potential to transform payment systems and financial markets.

The various pain points in current payment systems, such as high cross-border payment costs, slow settlement speeds, and the complexity of liquidity management, are driving the financial industry to seek more efficient and intelligent solutions. Currency tokenization is at the core of this exploration, enabling programmable, automated, and highly transparent payments and settlements through blockchain and smart contract technology. Digital currencies introduce new efficiencies and flexibility into the existing financial system, accelerating the flow of funds, enhancing transparency, and reducing reliance on intermediaries, thereby injecting new vitality into the global financial system.

New Horizons: Collaboration and Innovation in Digital Currency

Discussions about digital currencies and their application scenarios garnered widespread attention during the early rise of blockchain technology. With the rapid development of blockchain technology, the concept of digital currency has become a hot topic in many fintech forums and experiments. However, due to the immature understanding of blockchain technology and the digitization of currency in the past, coupled with the lack of corresponding legal and regulatory frameworks, many attempts have failed, leading to a gradual cooling of discussions in this field.

Since 2017, the industry has experienced multiple failed attempts and adjustments in policy and regulatory environments, causing discussions about currency digitization and the practical application of blockchain to gradually cool down. However, the rise of decentralized finance (DeFi) has changed this situation. The development of DeFi has reignited interest in blockchain and tokenization, and as blockchain infrastructure continues to improve, discussions about digital currency have heated up again and entered a new stage of development.

In recent years, many emerging technologies and standards have gradually matured, such as cross-chain technology, which allows assets and data to flow seamlessly between different blockchain networks, zero-knowledge proofs that enhance the privacy and security of transactions, and new token standards that further improve the diversity of asset and currency tokenization. The gradual improvement of these infrastructures has paved the way for the practical application of digital currencies and promoted further exploration of currency innovation and blockchain technology.

In 2020, the G20 signed a roadmap to enhance cross-border payments[18], recognizing the importance of efficient payment systems for global economic growth and financial inclusion. The core goal of this roadmap is to address the challenges in cross-border payments, improve payment speed and transparency, increase accessibility to cross-border payment services, and reduce costs. The G20's plan has propelled the development of digital currencies, while the attention and support from major global economies have provided solid policy guarantees for innovation in this field.

Goals and Vision of the G20 Plan

The G20's roadmap for cross-border payments aims to fundamentally improve the efficiency, transparency, and accessibility of the global payment system, especially in the area of cross-border payments. The plan aims to achieve several key objectives[19]:

Costs

• By 2027, the global average cost of remitting $200 should not exceed 3%.

• By 2030, the global average payment cost should not exceed 1%.

Speed

• By 2027, 75% of cross-border wholesale payments should be credited within 1 hour of initiation, with the remainder completed within one business day; cross-border retail payments and remittances should also be completed within a similar timeframe.

Access

• By 2027, ensure that at least 90% of individuals have access to cross-border electronic remittance methods, with all end users having at least one option for sending and receiving cross-border payments. Financial institutions should also provide at least one cross-border wholesale payment option in each payment channel.

Transparency

• By 2027, all payment service providers (PSPs) must provide minimum information, including transaction costs, expected arrival times, payment status tracking, and service terms.

Pain Points in Current Payment Systems

Despite the increasing importance of cross-border payments, existing payment systems face many pain points and challenges that severely affect the efficiency, cost, and accessibility of payments. According to the analysis by the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI), the main challenges facing cross-border payment systems include[20]:

1. High Costs:

Current cross-border payments involve multiple intermediaries, with each step adding to transaction costs. High costs make many small payments uneconomical, hindering the popularity of cross-border remittances.

2. Low Speed:

Cross-border payments often require a long transaction chain, with multiple participants' clearing and settlement processes causing delays. Batch processing and a lack of real-time monitoring further extend transaction times.

3. Limited Transparency:

Multiple stages in the payment process lack transparency, making it difficult for users to obtain detailed information about payment status and fees, increasing uncertainty and trust costs in payments.

4. Limited Accessibility:

Many users in various regions find it difficult to access cross-border payment services, especially in developing countries, where the coverage of financial institutions and payment services is insufficient, leading to widespread accessibility issues in cross-border payments.

5. Compliance and Complexity:

Cross-border payments involve complex compliance requirements such as anti-money laundering (AML) and counter-terrorism financing (CFT), with inconsistent regulatory requirements across different jurisdictions, posing significant compliance challenges for payment service providers.

6. Traditional Technology Platforms:

Existing payment infrastructures largely rely on traditional technology platforms, lacking real-time processing capabilities and unified standards for data transmission, resulting in low efficiency in cross-border payments.

Trends in Distributed Ledger Technology (DLT) and Digital Currency Applications

As cross-border payment technology continues to evolve, the application of distributed ledger technology (DLT) in digital currencies is becoming an important trend. DLT provides a reliable solution that can effectively address the challenges of current payment systems, particularly in cross-border payments, where it has significant advantages. Through DLT, payment systems can achieve data sharing, transparency, and real-time capabilities, which are currently lacking in payment systems.

The application of DLT is making three main types of digital currencies gradually become a reality: Central Bank Digital Currencies (CBDC), Tokenized Bank Deposits, and Stablecoins[21]:

1. Central Bank Digital Currencies (CBDC):

Digital currencies issued by central banks, CBDCs aim to enhance financial inclusion by providing reliable digital payment tools while reducing reliance on cash. As one of the technological options for implementing CBDCs, DLT-based CBDC architectures can facilitate efficient, low-cost cross-border payments while ensuring compliance and security. CBDCs are viewed as liabilities on the central bank's balance sheet, reflecting the central bank's direct responsibility to the public and backed by national credit, ensuring high stability and trust.

2. Tokenized Bank Deposits:

This is a digital representation of traditional bank deposits, utilizing DLT technology to enable bank deposits to be traded and settled in token form. Tokenized bank deposits not only improve payment efficiency but also allow for real-time clearing between banks, reducing the cost of capital usage. Tokenized bank deposits are liabilities on commercial banks' balance sheets, similar to traditional bank deposits, with commercial banks responsible for repayment to depositors, and their value is based on the credit of commercial banks, influenced by the banks' liquidity and regulatory framework.

3. Stablecoins:

Stablecoins are digital currencies that are pegged to the value of fiat currencies or other assets, designed to maintain price stability. Stablecoins are commonly used in decentralized finance (DeFi) ecosystems to provide fast, low-cost payment solutions. DLT enables stablecoins to be efficiently transmitted globally, reducing friction and intermediary costs associated with traditional payment systems. Stablecoins are typically issued by private companies, representing the issuer's liabilities to holders, with the collateral assets backing them. Their credit relies on the quality of the collateral and the issuer's reputation, and they are usually pegged to fiat currencies or other assets.

Advantages of Digital Currencies

The rise of digital currencies comes with numerous advantages, making them an important component of the financial system. Specifically, digital currencies exhibit significant advantages in the following areas[22]:

Shared Ledger

Digital currencies utilize distributed ledger technology (DLT) to provide a unified infrastructure for cross-border and domestic payments. Compared to information silos in traditional systems, DLT effectively reduces operational costs.

Reduced Transaction Time

The decentralized nature of DLT allows transactions to be completed in seconds to minutes. For example, traditional cross-border payments typically require 2-5 days for processing, while digital currencies can shorten this time to seconds to minutes.

Atomic Settlement

Digital currencies and DLT feature atomic settlement, ensuring that the funds and assets of a transaction are settled simultaneously, significantly reducing counterparty risk. This mechanism is particularly beneficial in cross-border payments and high-frequency trading, as it ensures that transactions are executed only when both parties meet the conditions, preventing partial failures.

Transparency

The transparency of DLT greatly enhances the visibility of transactions, allowing all participants to view and verify transaction records. Blockchain platforms can reduce reconciliation times from days to seconds, which means reduced counterparty risk, especially in multi-party supply chain finance and trade finance scenarios.

Elimination of Intermediaries

Digital currencies facilitate peer-to-peer transactions, reducing reliance on intermediary institutions. For instance, traditional international remittance systems often involve multiple banks or payment processors, while digital currencies enable direct transactions between senders and receivers, lowering fees and delays.

Financial Inclusion

According to World Bank data, 1.4 billion people globally still lack access to banking services[23], yet over 60% of people own mobile phones. Digital currencies can provide low-cost, easily accessible payment solutions via mobile devices. Particularly in regions with underdeveloped financial infrastructure, digital currencies like stablecoins allow users to participate in the global economy without a bank account, promoting global financial inclusion.

Compliance and Security

Digital currencies achieve automated compliance and secure transactions through smart contracts, reducing human error and minimizing fraud and security risks through pre-programmed rules. For example, in financial markets, smart contracts can automatically execute KYC (Know Your Customer) and AML (Anti-Money Laundering) processes, ensuring compliance in cross-border transactions.

Programmability

The programmability of digital currencies allows conditions and logic to be attached to the currency, making payment systems more flexible and efficient. For example, programmability enables financial institutions to build highly customized payment processes, resulting in greater efficiency and security in scenarios such as supply chain finance, cross-border payments, and automated investments. Additionally, smart contracts can embed compliance checks to ensure that AML and KYC requirements are automatically fulfilled during transaction execution, further enhancing the security and compliance of payments.

New Paradigm of Programmable Currency

Digital currencies not only facilitate value transfer, but issuers can also embed various programming logic within them, bringing multiple advantages such as improving user experience, enhancing the transparency, efficiency, and accessibility of financial services, and promoting novel and creative applications in payment transactions, such as automated conditional payments, pre-authorizations, creating conditional escrow deposits, foreign exchange for cross-border payments, and complex financial operations.

This is in stark contrast to the traditional financial technology system's definition of digital currencies, where digital currencies are generally established through database entries. In such a system, to achieve "programmability," an additional technical system independent of the database must be developed and connected to the database, either by providing connections internally to entities responsible for database maintenance or externally to customers via application programming interfaces (APIs). Applications interact with database records through traditional database APIs that expose program logic[24]. In simple terms, in the traditional system, value storage and programming logic are kept separate, while in decentralized ledgers (blockchains), the value storage of "programmable currency" is integrated with programming logic, creating a new paradigm.

Despite the many benefits that digital currencies bring, the ability to simply attach programming logic to currency units remains controversial, primarily revolving around the principle of "Singleness." According to this principle, all different forms of currency, regardless of whether they are stored in bank accounts, paper money, or coins, must be exchangeable at face value. In other words, the dollar value in a personal bank account must equal the dollar coin in another person's pocket. The same applies to digital currencies, where maintaining homogeneity is crucial. Therefore, if we wish to implement some complex usage logic for programmable currency, such as using ERC-20 standard stablecoins for escrow payments or for specific purposes, the ERC-20 standard does not support such complex capabilities, necessitating additional customization and the deployment of new contracts. Consequently, the programmable currency may lose its "Singleness." Imagine whether a programmable currency that can only purchase apples is homogeneous with a programmable currency that complies with the ERC-20 standard.

In summary, the challenge of programmable payments lies in the fact that for programmable currency to implement more complex programming rules, it requires customized programming of the programmable currency itself. This action not only risks the currency losing its "Singleness" but also raises policy and public trust issues, potentially leading to excessive control by the institutions managing the execution mechanisms[25]. To address this challenge, the Monetary Authority of Singapore has proposed a new monetary tool called "Purpose-Bound Money" [26], attempting to explore the expansion of the programmability of currency without affecting the initial asset's homogeneity and "Singleness," and elaborating on several current forms of programmable payments:

• Programmable Payments: Programmable payments refer to payments that are automatically executed upon meeting preset conditions. For example, daily spending limits or recurring payments can be set, similar to direct debits or long-term subscriptions. Typically, programmable payments are achieved by setting database triggers or API gateways that sit between the ledger system and client applications. These interfaces interact with traditional ledgers and adjust account balances based on programming logic, enabling automated fund management. Programmable payments have numerous application cases in banks and internet payment platforms, such as:

• Recurring Bill Payments: Bank customers can set up automatic payment features for regular payments like utility bills, rent, or loan installments. Once the scheduled date arrives and the account balance is sufficient, the system will automatically deduct the payment without requiring manual intervention from the user.

• Personal Financial Management: Users can set daily or weekly spending limits for themselves. For instance, if a user sets a daily limit of $50, once their spending reaches $50 for the day, the system will automatically reject further spending requests, helping users better control their expenses.

• Sub-account Management and Allocation: Some banks and internet payment platforms allow users to create sub-accounts and set different payment conditions for each sub-account. For example, users can designate a sub-account for paying their children's education expenses or a fixed monthly allowance, with all payments automatically executed based on preset conditions.

• Programmable Currency: Programmable currency refers to an exchange medium that combines value storage and programming logic, where these programming rules define or restrict its use, such as the transfer (Transfer), approval (Approval), burn (Burn), and whitelist (Whitelist) functions defined in the ERC-20 standard, or rules that dictate that value storage can only be sent to whitelisted wallets.

The implementation of programmable currency includes stablecoins, tokenized bank deposits, and CBDCs. Unlike programmable payments, where programming logic and value storage are separate, programmable currency is self-contained, incorporating both program logic and value storage. This means that when programmable currency is transferred to another party, the logic and rules also transfer along with it.

• Purpose-Bound Money: Programmable currency refers to an exchange medium that combines value storage and programming logic, where these programming rules define or restrict its use, such as the transfer (Transfer), approval (Approval), burn (Burn), and whitelist (Whitelist) functions defined in the ERC-20 standard, or rules that dictate that value storage can only be sent to whitelisted wallets.

The implementation of programmable currency includes stablecoins, tokenized bank deposits, and CBDCs. Unlike programmable payments, where programming logic and value storage are separate, programmable currency is self-contained, incorporating both program logic and value storage. This means that when programmable currency is transferred to another party, the logic and rules also transfer along with it.

The use cases for Purpose-Bound Money are extensive, covering everything from everyday consumption to complex financial transactions. Here are several typical application scenarios[27]:

• Coupons: Purpose-bound money can be used to issue and manage digital coupons. For example, a shopping mall can design coupons in the form of purpose-bound money that can only be used at specific merchants, for certain products, or within a designated time frame. When consumers make purchases under qualifying conditions, the funds in the purpose-bound money will be automatically released to pay for part or all of the costs.

• Cross-Border Payments and Foreign Exchange: Cross-border payments have traditionally faced high fees and foreign exchange transaction costs, along with heavy compliance requirements and manual processes. However, by adopting purpose-bound money (PBM), these issues can be alleviated. PBM utilizes smart contracts to coordinate compliance needs for cross-border anti-money laundering (AML) and know your customer (KYC) regulations through its "built-in compliance." For example, PBM can preset usage conditions to comply with fund flow rules (such as the FATF travel rule) and automatically complete KYC verification for users and their wallets, as well as whitelist/sanction checks when the transaction purpose is achieved. In countries with currency controls, PBM can also introduce spending limits to comply with local regulations.

Moreover, PBM can achieve compliant foreign exchange through its compatibility with decentralized exchanges (DEXs). Users can make payments in one currency and then automatically convert it to another currency via smart contracts. This foreign exchange process can be completed through DeFi protocols (such as automated market makers (AMMs), order books, or vaults), with exchange rates dynamically adjusted based on the liquidity of specific currency pairs. Although this approach requires a significant amount of currency pairs and sufficient liquidity pools on-chain, as digital currencies become more widespread and decentralized ledger (blockchain) technology develops, this model will mature, bringing higher efficiency, lower costs, and stronger compliance guarantees to global cross-border payments.

• Programmable Escrow Payments: Escrow payments have been widely used in global economic activities. For example, in international trade scenarios, trading entities use instruments like letters of credit to achieve "payment upon delivery" transactions, where payment is guaranteed by the bank's credit, and sellers can only receive payment after fulfilling their obligations. In e-commerce scenarios, when users shop on e-commerce platforms, after the buyer places an order and makes a payment, the funds do not immediately transfer to the seller's account but are held in escrow by a third-party platform. Only when the buyer confirms receipt of the goods and is satisfied will the funds be released from the escrow account to the seller. If the buyer does not confirm receipt within a certain time frame, the system will default to confirmation, and the funds will then automatically transfer to the seller, retaining the buyer's payment rights until they receive and confirm satisfaction with the goods.

In the trend of programmable payments, purpose-bound money (PBM) provides an innovative solution for this process. Through PBM, payments can be pre-packaged in a "programmable form" and transferred to the other party, automatically unwrapping upon the buyer's confirmation of receipt, with funds released to the supplier. This "programmable escrow" mechanism ensures that funds cannot be withdrawn until pre-set conditions are met, and once the transaction is completed, the payee can receive payment immediately. Since the escrowed funds are visible to both parties in the transaction, their programmability significantly reduces the possibility of fraud. Additionally, tokenized escrow funds can also be used as collateral, similar to factoring, helping merchants more easily obtain credit support and improve financial resilience.

• Charity/Public Purpose Funds: For the management of funds for charitable organizations or public purposes, purpose-bound money can ensure that the use of funds strictly adheres to designated purposes. For example, governments or charitable organizations can set relief funds to be used only at specific supermarkets or pharmacies, and only for purchasing essential goods or medications. This characteristic of purpose-bound money prevents the misuse and misappropriation of funds, ensuring that every donation is used for its intended purpose. Additionally, the built-in compliance module can ensure that the disbursement and use of funds are transparent, traceable, and compliant with relevant regulatory requirements.

Case Studies of Digital Currencies and Smart Contracts

The programmable potential of combining digital currencies with smart contracts is immense, significantly enhancing the efficiency, transparency, and security of financial transactions. The automation features of smart contracts allow for the automatic completion of fund and asset settlements when preset conditions are met, reducing human intervention and operational risks. This efficient and secure trading model demonstrates great application value and development potential across various fields, including trade finance, cross-border payments, and supply chain management. Currently, many public sectors and private institutions worldwide have embarked on a series of explorations. Here are several typical application scenarios:

Simplifying Trade and Supply Chain Financing:

• Project Dynamo: Project Dynamo is initiated by the Bank for International Settlements (BIS) Innovation Hub, the Hong Kong Monetary Authority, and Linklogis. By utilizing Digital Trade Tokens and smart contracts, it has created an innovative financing solution for SMEs on DLT. The project aims to simplify the supply chain financing process through electronic bills of lading and programmable payment mechanisms, helping SMEs obtain more efficient and transparent funding support. Additionally, each node in the supply chain can achieve automatic fund release through smart contracts, reducing default risks[28].

• Australian Tokenized Invoice CBDC Pilot Project: The Australian CBDC pilot project is initiated by the Reserve Bank of Australia, the Digital Finance Cooperative Research Centre (DFCRC), and Unizon. This pilot project demonstrates the application of tokenized invoices in third-party sales and payments, involving a wholesale car dealer (supplier), a third-party financing institution, and wholesale car buyers. The supplier generates a tokenized invoice representing the buyer's payment request and sells it in parts to a third-party financing institution to optimize the supplier's working capital. When the invoice matures, the buyer pays using a stablecoin supported by the pilot central bank digital currency (CBDC), and the system automatically settles the payment to both the supplier and the financing institution[29].

Cross-Border Payments:

• Project Agorá: Project Agorá is a major initiative launched by the Bank for International Settlements (BIS) in collaboration with seven central banks, based on the unified ledger concept proposed by BIS. It aims to explore how the functions of wholesale central bank currencies and commercial bank deposits can be integrated on a programmable platform to improve the operation of the monetary system. Participating central banks include the Bank of France (representing the euro system), the Bank of Japan, the Bank of Korea, the Bank of Mexico, the Swiss National Bank, the Bank of England, and the Federal Reserve Bank of New York. The project also collaborates with over 40 private financial sector entities, including SWIFT, VISA, and Mastercard, to promote the modernization of the monetary system[30].

• Project mBridge: Project mBridge is a cross-border payment platform developed in collaboration by multiple central banks, aiming to improve the efficiency and cost of cross-border payments through central bank digital currencies (CBDCs). The project is jointly initiated by the central banks of China, Hong Kong, Thailand, and the UAE, with the goal of simplifying payment processes in multilateral cross-border transactions using CBDCs[31].

• Project DESFT: Project DESFT is initiated by the Monetary Authority of Singapore, the Bank of Ghana, Ample FinTech, StraitsX, G+D, Liquid Group, and Proxtera, aiming to lower the barriers for SMEs to participate in international trade and cross-border payments. In this project, digital currencies and smart contracts are used in cross-border payment scenarios between Singapore and Ghana, achieving interoperability between Singapore stablecoins and Ghana's CBDC eCedi through the use of purpose-bound money, ensuring that digital currencies are only released when specific conditions are met, enhancing transaction transparency and security, and reducing credit risks in cross-border payments, thereby promoting financial connectivity between different economies[32].

• Project Mariana: Project Mariana is a collaboration between the Bank for International Settlements (BIS) and the central banks of France, Singapore, and Switzerland, testing cross-border transactions and settlements of wholesale central bank digital currencies (wCBDC) through decentralized finance (DeFi) technology. The project successfully achieved seamless trading and settlement of wCBDC in euros, Singapore dollars, and Swiss francs among simulated financial institutions using unified technical token standards, cross-network bridges, and automated market maker (AMM) mechanisms, demonstrating the immense potential of DeFi technology in cross-border payments[33].

Green Finance

• Project Genesis: Project Genesis is a green finance initiative launched by the BIS Innovation Hub in collaboration with the Hong Kong Monetary Authority (HKMA) and the United Nations Climate Change Global Innovation Center, aiming to explore how blockchain and smart contract technology can be used to digitize green bonds. As part of the project, Project Genesis 2.0 developed two prototypes for tracking, delivering, and transferring digitized emission reduction outcome rights (MOIs), which are linked to carbon reduction contracts. MOIs are carbon reduction tools attached to green bonds, and bond issuers commit to using carbon credits for future repayments through these contracts, aiming to enhance the transparency and environmental integrity of the green bond market[34].

Final Thoughts

The native crypto market has stagnated, with little innovation; for cryptocurrency enthusiasts, the tokenization of real-world assets may seem dull. However, for the broader financial system, asset tokenization represents a significant evolution of financial infrastructure, and exploring tokenization on public blockchains is particularly important.

In this report, we examined the practices and innovations of various market participants from the perspectives of asset tokenization and currency tokenization. We envision a future where all assets are represented in tokenized form on public blockchains. Currently, real-world assets (including stablecoins) on public chains only amount to $200 billion. McKinsey's analysis suggests that by 2030, the tokenization market could grow to approximately $2 trillion. This indicates a vast market potential, with many new application scenarios waiting to be explored.

Special thanks to Kenneth Lim, Marko Quintero, Weiling Lee, Adimas Yosia Prasetiyo, and Ivy Huang for their contributions and support. Without them, this research would not be as comprehensive.

Download Chinese Version

Download English Version

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。