On Thursday, Christopher Waller, governor of the Federal Reserve, expressed his opinion regarding the use of blockchain technology, smart contracts, and tokenization in the financial market.
Addressing the audience present at the “Innovation and the Future of Finance” at the Cryptocurrency and the Future of Global Finance event, Waller seemed optimistic about the topic. He highlighted the benefits of smart contracts in improving efficiency in the financial sector.
According to Waller, financial firms have been experimenting with blockchain technology and smart contracts to execute foreign-exchange trades aimed at enhancing efficiency. He stated:
In fact, private sector institutions are testing use cases to better understand the benefits and risks of this technology. Firms have executed foreign-exchange trades using blockchain technology with smart contracts in an attempt to improve efficiencies.
Additionally, the Fed governor stated that the participants engaged in transactions could enjoy greater flexibility in terms of the settlement time. Furthermore, he highlighted that blockchain’s atomic settlement function could function as a crucial risk reducer.
To illustrate his point he refers to repurchase agreements and explained that where the “seller” of repo collateral could be assured of receiving the specified loan amount, while the “buyer” could be confident about receiving the specified collateral.
While Waller mostly pinned up his hopes in the context of blockchain technology and tokenization, he did acknowledge the risks involved. He highlighted that these innovative technologies carry risks of their own, particularly in relation to cyber security. The Fed Governor highlighted that the adoption of smart contracts and tokenization involve certain significant risks, including bugs, cyber threats, and settlement risks.
Nonetheless, he concluded his speech on an optimistic note about the potential of these technologies to improve the efficiency of traditional financial transactions. Moreover, he expressed his excitement and eagerness to see the role of the private sector’s innovations in enhancing transaction processes.
Waller also spoke about the potential of tokenization and artificial intelligence (AI) to play a prominent role in banking and the economy. However, he did not touch upon any monetary policy-related issues.
Notably, these comments from the Fed governor mark a part of his overall message of embracing innovation in the financial sector, while also recognizing the need to carefully consider potential risks and challenges.
The benefits of blockchain technology and tokenization have already caught the attention of government agencies in the US. In February, the Bank of America (BAC), released a report naming several US government agencies that have successfully adopted blockchain technology for efficiency and lower costs. The California Department of Motor Vehicles (DMV) tokenization project was one of the examples of companies and state and federal agencies in the US using blockchain-based solutions to drive efficiencies and lower costs.
With the emerging prominence of blockchain technology, financial institutions across the globe are keen to try it to maximize its utility. In collaboration with the central bank of Singapore, JPMorgan participated in its first-ever decentralized finance (DeFi) transaction. The pilot program’s goal is to identify the potential use cases of DeFi applications in the financial markets. Additionally, it was an asset tokenization and international transfer experiment.
In January, a Swiss private bank called Cité Gestion started tokenizing its equity using blockchain technology. Sources reveal that with tokenization, the bank’s share registry will automatically and continuously update itself whenever a share transfer happens or capital increases.