Banks want to move onto blockchains, but they cannot put client data on a public network. That tension between privacy, compliance and open markets decides whether tokenization moves from pilots to live capital markets. Marcos Viriato, Co-Founder and CEO of Parfin, explains why the market is shifting from pilots to production and what banks mean by a closed loop. He also shares how private networks can connect to public blockchains, what the Gulf could do first, how regulators can see what they need to see, and what Brazil’s receivables model can teach other markets.
Get the latest news and updates on FINTECH.TV
Why Banks Want Private Blockchains and What It Takes to Move Tokenization Into Live Markets
Tokenization has been talked about for years. What is the real barrier stopping banks from moving assets on chain, and are we finally moving from pilots into live markets?
The move we have seen over the last few months is that it used to be all about pilots, tokenizing some assets here and there. Now, with the advent of private networks and privacy on chain, banks are really starting to tokenize funds initially, but also stocks and other assets, on a private network where the client's data is protected and the transactions are shielded from other people. For instance, DTCC in the US just launched its permissioned network, and a few other networks are emerging with the same concept, where participants from capital markets join in a permissioned way and follow the rules of that particular network.
Banks cannot simply use public blockchains today. What stops them?
Some banks are using them in what we call a closed loop. They tokenize, for instance, a money market fund, but that fund cannot be transferred to a MetaMask wallet. It stays under the control and custody of the client. That is why we call it closed loop. Despite being tokenized on a public chain, it is controlled. Generally that fund stays in an omnibus wallet, meaning you are not splitting it across multiple wallets where people could see who owns what and in what size. For capital markets especially, imagine a tokenized stock split across different wallets. If it moves to be traded, people would see this particular stock moving from this wallet to the market to be sold, and that could trigger front running and other behaviour that cannot happen under existing regulation.
Rails connects private bank networks to public blockchains. In plain terms, how does that work?
Some banks we work with tokenize, for example, certificates and funds internally on their private network to distribute to their clients. That has been working for a while. But some of those banks also distribute their products to other asset managers, financial institutions or investment platforms, so they need to expose that asset to that party. Again in a closed loop, they can bridge the token from the private network to the public one, so the distributing party can access it in a permissioned way. They cannot send that token to a MetaMask wallet. It stays under the control of the distributor.
In August you launched Rails Sovereign, which lets a bank run its own blockchain inside its own systems. Why would a bank want that?
The way we see the future, all banks will move assets on chain, and they will need their own blockchain to control their assets, especially for their own clients. We have clients with 60 million customers, 110 million customers, 35 million customers. If they start tokenizing assets for their own customers, they do not need to do it on a public chain, because these are their own clients within their own control. But they need to be on chain because it is more efficient. They can fractionalise assets, do delivery versus payment and use collateral mobility. We believe every single bank in the world will require its own private network, and Rails Sovereign was designed to fulfil that.
What does the Gulf need to do to bring deposits, stablecoins and real world assets on chain?
We have been talking to some banks in the Gulf. One of them requires its own private network to tokenize deposits, and with tokenized deposits they asked whether we can connect to the SWIFT ledger and to the BIS Project Agora for cross border payments. I think that would be an initial use case for the Gulf: banks tokenizing deposits and interacting with local and global networks for cross border payments.
Regulators need visibility while clients need privacy. How can both be protected on the same network?
We designed a privacy preserving protocol that gives a view key to the regulator. The regulator can open a transaction and see what is in it, from which address it moved to which recipient address, and so on. The operator of the permissioned network can give the view key to the regulator, so the regulator can see the transactions, balances and assets.
Brazil's payments infrastructure is tokenizing receivables in production. What can the Gulf learn from that model?
Commercial receivables, credit card receivables and trade finance receivables are the engine of the economy. Companies sell and have invoices, and some of them need to anticipate cash flows. Tokenizing those future cash flows is a very good way of funding companies. Brazil is not different, and I believe the Gulf is not different either. This instrument could be very powerful for financing corporations, projects and growth.