The boundaries between TradFi and crypto finance are gradually blurring, even if the brakes remain. Tokenization and security tokens are whetting appetites, and the digital euro could drive adoption. Expert opinion from AFG, Bpifrance, CACEIS and Oddo BHF.
Jean-Marc Stenger, CEO of SG Forge, explained in an interview that marketing of the first tokenized financial products in Europe will take place in three stages. First, it is the organization of transactions. This stage is already underway. The next one will be based on a pilot plan.
The last step will be the transfer of entire sections of markets to the blockchain. The adoption of digital currencies by the central bank will be one of the triggers. Other engines will be required. And they are gradually taking effect, as experts in the field of traditional and cryptocurrency finance gathered at the AM Tech Day 2022 conference showed.
Possibilities of tokenization
Among the wealth management players represented by the association Française De La Gestion Financière (AFG), crypto and blockchain have been generating long-standing interest, as evidenced by the President of its Technological Innovation Commission.
This is a topic that we are following closely,” states Muriel Fauré.
The organization also plans to address the crypto theme again in November as part of a white paper focusing on the digitization of controls. And when this industry is projected 5 to 10 years ahead, it envisions the place that asset tokenization, which is considered “highly opportunity-creating,” will take.
However, in order to realize these opportunities and to encourage investment, it is necessary to remove the “psychological, real, as well as fiscal” brakes. Thus, it is about facilitating transactions with bitcoins “offering the most liquidity”, but not only and not even a priority.
The opportunities for asset tokenization are even greater,” insists the head of AFG.
However, private investment faces obstacles, even though the Pacte law allows investment in crypto funds in principle. Problem: The latter, such as life insurance, do not find distributors, and these products remain limited to professional clients.
We must overcome blockages, including distribution by insurance companies,” says Muriel Fauré.
Therefore, management companies are working on it. To these activities should also be added acculturation operations, in particular with risk departments and bank advisors.
Cryptocurrency Adoption in TradFi Driven by Consumer Demand
The Oddo BHF bank has carried out this task of acculturation within the company for several years and with various organizational functions. The move began 4 years ago in partnership with Consensys as part of a “from scratch to crypto” project, says Alexis Le Portz, the company’s director of innovation.
This project helped us explain what a token and blockchain are, how they are used and how they can interact with internal systems, and then start to calm down,” he continues.
The results waited until 2022, in particular, through a stake in Coinhouse. Others are expected, for example, through partnerships.
Bitcoin’s volatility is both an advantage and a disadvantage, notes the head of Oddo. The Franco-German and Swiss bank also has to deal with three different regulatory frameworks. On the other hand, he can rely on the conviction of his leader, Philippe Oddo, and on the interest of his clients.
The adoption of crypto is a journey that often begins with consumer demand, as in CACEIS through a management company and a family office, evidenced by its chief digital officer Arnaud Misset.
Our clients, including one in particular, have asked us to act as custodian, custodian and fund administrator. Guardianship is not with us at the moment. The service is under development and will open in early 2023,” he says.
Tokenization and security token are on the rise at CACEIS
From this point of view, the financial player will cooperate with Taurus to store the private keys of the assets. Thus, the CDO of the banking institution, a subsidiary of Crédit Agricole and Santander, is watching developments and the expansion of the scope of cryptocurrency.
The shift is quite understandable. Two or three years ago, we only talked about cryptocurrencies. Today, at least a quarter of our requests are related to tokenization and security tokens. We see the market changing and changing fast.”
The pace of this transformation is outpacing that of regulation, which is not without obstacles.
It is necessary that the established rules bring comfort, confidence and reassure [conseillers et équipes risques] (…) The only thing I fear is the very long duration of these rules,” emphasizes Muriel Fauré, speaking of the pilot regime and MiCA with probable validity periods in 2029 and 2025.
Therefore, it is a priori difficult to combine the long time of regulation and the very short time of innovation areas such as cryptocurrencies. To gain a foothold in crypto in this context of legal uncertainty, Oddo BHF has decided to invest and partner with specialist partner Coinhouse in the short term.
As for other initiatives, the bank focuses on the medium and long term. “What is difficult is to explain that this will not happen in 2023. This is a reality that managers, perhaps a little far from the operational and technological subject, find it difficult to understand,” notes Alexis Portz.
Europe should promote pragmatism towards cryptocurrencies
The fragmentation of normative acts does not contribute to this understanding either. Different digital assets (cryptocurrencies, CBDCs, NFTs, security tokens, etc.) are subject to different legal frameworks. In addition, the storage of cryptocurrencies raises acute questions in the fight against money laundering and terrorist financing. However, solutions such as Chainalysis have appeared on the market to solve these problems.
At the custodial level, the topic is no longer operational and technical (…) but much more about risk and compliance, where discussions remain open on several issues… and can last for a certain amount of time,” says Arnaud Misset from CACEIS.
Yvan de Lastour also warns against a prisoner’s dilemma that could affect Europe. “The cryptocurrency planet will go where it can shine,” says Bpifrance crypto and blockchain pilot. However, the “pragmatism” of American institutions and regulators today favors the creation of this industry in the United States.
We are at a small crossroads. I hope that we will make the right choice and find a European way to achieve a reasonable synthesis, as has been done in other subjects,” the Bpifrance specialist urges.
Wholesale digital euro: “booster”
The AFG representative sees MiCA as a step in that direction. However, the financial industry has other expectations, including CBDC. Muriel Faure also welcomes the work of the Bank of France to create a wholesale digital euro in 2023.
This is an important element for the success of pilot projects on seamless settlement (…) This will be an extremely decisive factor and stimulus for the development of the use of blockchain and crypto-assets,” she states.
This analysis is shared by Arnaud Misset. “We are looking forward to central bank digital currencies,” he says. CBDC, due to the lack of use of stablecoins in Europe, is necessary to bring the cash and securities sides of the blockchain together and thus allow market funding to change.
The sector also needs a secondary market to develop, warns CACEIS Securities and Exchange Director. However, recurrence and the liquidity it brings are not expected within three to five years. Arnaud Misset also calls for putting interoperability “at the center of the debate,” starting with interoperability between CBDCs and existing stablecoins.
Yvan de Lastour concludes by urging European leaders to invest in technological capabilities, as the United States did with Chainalysis, “the intelligence database for all cryptocurrency transactions.” It’s a real battle chest.”
They took risks and wrote out carte blanche to bring out the champions (…) We must also [Ndlr : l’Europe] that we are investing in tools in order to have our own technical capabilities (…) This is a European problem.”