At the New York Times’ 2022 Dealbook Summit, the CEO of capital venture firm BlackRock, Larry Fink, made the claim that the future for global markets will be tokenisation. By this he meant that financing will move on to DLT (distributed ledger technology) and transactions will be made digitally and securely using cryptographic assets commonly known as ‘tokens’.
Larry Fink was responding to a question about ETFs – exchange-traded funds. He pointed out that ETFs had previously been one of the key driving forces in investment, but that now it was blockchain technologies that were key to driving investment.
ETFs are composed of stocks, securities, currencies and assets such as gold. They are normally modelled on indexes such as the S&P 500 or the NASDAQ. They seek to emulate in their composition the relative capitalisations of each company in the index. ETFs are primarily computer generated. They shadow the markets to gain the best chance of capturing value as indexes rise. They are tax efficient and highly automated to reduce costs. Thus, they were (and still are) attractive investment opportunities.
Fink stated his case thus:
“I believe the next generation for markets, the next generation for securities, will be tokenization of securities. Think about instantaneous settlement [of] bonds and stocks, no middlemen, we’re going to bring down fees even more dramatically.”Larry Fink, BlackRock
As with ETFs, the key advantage with tokenisation (turning assets into crypto tokens), is automation. There is no need for stock brokers and banks to effect purchases and sales of bonds and stocks. These actions can be done securely using blockchain technology. Transactions can be recorded on the blockchain. Transaction data is not held on a central ledger. Rather it is distributed across the blockchain. Transaction data cannot be tampered with and is totally transparent.
However, Fink did provide a word of caution. He believed that most companies in the crypto space “are not going to be around” in the future. He cited the example of the FTX Exchange that recently went bankrupt. In the case of FTX, Fink believed that the mistake made was that the exchange leveraged its own token in order to expand. As soon as cryptocurrencies started falling in price across the board, the company was doomed to failure since it could no longer redeem all the money it had ‘created’ in FTX tokens. Fink was speaking with a certain amount of hindsight after the fact since BlackRock had a $24 million investment in FTX.
Indeed, it seems BlackRock has modified its business model. It recently announced the creation of an ETF that would be composed of 35 blockchain-related companies. Rather than blockchain replacing ETFs as the main driver for investment, this strategy seeks to combine the technological innovation of blockchain with the financial innovation of ETFs.