Cryptocurrencies and Banking: Tokenization of the global financial system is yet to come

Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of the crypto.news editorial.

This is part two of a three-part interview series with William Quigleya cryptocurrency and blockchain investor and co-founder of WAX and Tether, led by SelvaOzelli exclusively for crypto.news. The first part is about Prison sentences of Sam Bankman-Fried and Changpeng Zhao. The second part is about cryptocurrency and banking. The third part is about the future of NFTs.

1) In the first part of our interview, you said that you started your career at Andersen as a bank auditor. Coincub recently released a cryptocurrency report ranking the most crypto-friendly banks in the world. What do you think about tokenization of the banking system?

I could write a book on this topic, but I will summarize my thoughts briefly.

Money and payments have evolved as long as they have existed. The methods society uses to store and transfer value have changed in my lifetime, first through digitization and now through tokenization. Each major update to the global monetary architecture has introduced both new benefits and new risks over the past few decades. With digitalization, the vast majority of what people generally think of as “money” is, in fact, account balances deposited in databases maintained by commercial banks. As a general rule, banks primarily, but not exclusively, use relational databases that run on Unix and similar operating systems, first developed in the 1960s.

The tokenization of the global financial system is still in its early stages. However, it could have a transformative impact on how ownership of commercial bank deposits, payments, government and corporate bonds, money market fund shares, gold and other commodities, real estate, and other assets and liabilities are recorded on blockchain and other distributed ledgers. , enabling far-reaching new features.

As detailed in Coincub Cryptocurrency Report, several financial institutions around the world have been actively exploring the possibility of tokenizing assets to improve how we transfer value by using blockchain technology to facilitate fast, secure, and low-cost international payment processing services (and other transactions) through Distributed services use encrypted ledgers that provide reliable real-time verification of transactions without the need for intermediaries such as correspondent banks and clearing houses. Despite recent advances in digitalization, our banking payment and settlement systems remain slow and inefficient for many users, with delayed settlements for large classes of transactions and numerous intermediaries, each adding layers and layers of costs.

Tokenization and distributed ledgers have the potential to overcome many of these obstacles by operating globally around the clock and introducing real-time settlement finality. Since tokenization offers:

• Programmability– which could make it easier for the bank and its customers to automatically remove funds, respond to liquidity strains immediately and automatically, and move liquidity when and where it is needed.
• Immediate balance– which could provide the ability to transfer future value transfers onto the ledger that will automatically self-execute based on the occurrence of future conditions, thus increasing the speed and intensity of banking regulations.
• Atomic settlement—which can reduce the risk of loss in the time between payment and delivery or the simultaneous exchange and settlement of payment and delivery, even between multiple parties.
• Immutability of the shared registry– which can serve as a transaction log and reliable audit trail. Blockchain-based IT infrastructure can significantly reduce payment errors and shorten account reconciliation times. The transparency and immutability of the ledger can help regulators and law enforcement obtain accurate and verifiable data on token transactions and seize assets from criminals.

While tokenization of the global financial system will face challenges and risks as financial institutions, developers, regulators and other stakeholders continue to develop the technology, we already see examples of how tokenization is starting to provide tangible benefits in the global banking sector. For example, in China, the digital yuan, launched in 2020, could put China ahead of Europe and the United States in the global race to develop a state-backed digital currency, also known as central bank digital currency (CBDC), used throughout their banking system. According to data, digital yaun has been mainly used for domestic retail and public sector payments amounting to 100 billion yuan ($14.5 billion) so far. released from the People’s Bank of China.

2) What challenges and risks will tokenization introduce to the banking sector? THE fall of the FTX cryptocurrency exchange, which we talked about during the first part of our interview, was a watershed moment whose ripple effects included a market crash, a cryptocurrency crisis in 2023 with five bank failures, regulatory reactions and further failures. On April 26, US regulators Closed Philadelphia-based Republic First Bank marks the nation’s first bank failure in 2024 due to “material weaknesses in internal control over financial reporting.” However, this could just be the start of more bank failures, consultancy Klaros Group claims analyzed approximately 4,000 U.S. banks and identified 282 smaller banks that face potential losses related to higher interest rates.

From a technological and operational perspective, many open questions remain regarding the tokenization of the global banking system. If tokenization will play a central role in our future financial system, with small banks taken over by larger banks when they fail, many questions remain unanswered:

• Will there be just a small handful of unified, interoperable banking ledgers on which all globally tokenized transactions occur?
• Or will many banks keep their own blockchains?
• To what extent will these banking blockchain platforms be interoperable so that customers using different blockchains can transact globally and seamlessly with each other in a safe and secure manner?
• How will cybersecurity and other financial risks be managed among banks? For example, when The Silicon Valley bank failed last year, stablecoin USDC broke the peg to the dollar after Circle, the US company behind the coin, revealed that $3.3 billion of the $40 billion in USDC reserves backing it were held at Silicon Valley Bank. In contrast, at Tether (USDT)—the world’s first and most traded stablecoin, which I co-founded—reserve deposits transparently disclosed to the public on a daily basis were better managed against the risk of bank failures.

Then, there is the legal, regulatory and tax perspective, with countries introducing different legal, regulatory and tax regimes governing digital assets and blockchains. Further work is needed to clarify the extent to which ownership and other rights associated with a given asset link and move across borders with a token.

Ultimately, these and many other critical questions will be answered, one way or another, as financial institutions, developers, regulators, and other stakeholders continue to develop blockchain technology around the world. Meanwhile, with the leadership of the Financial Action Task Force (FAFT) and the Organization for Economic Co-operation and Development (OECD), some global standards in money laundering and tax laws are being established.

3) In the first part of our interview, you indicated that you co-founded the first fiat-backed stablecoin Tether, the most traded digital asset in the world, taking the lead in the industry with strong competition from Meta, BRICS countries and other. Tell us about the Tether stablecoin.

Tether is a fiat-backed stablecoin launched by Tether Limited Inc. in 2014. Tether Limited is owned by British Virgin Islands-based iFinex Inc., which also owns Bitfinex, a Hong Kong-based cryptocurrency exchange offering investing in digital assets and trading with users outside the United States.

As of May 2024, Tether has been minted across 14 protocols and blockchains. Tether stablecoins avoid the extreme volatility of digital assets, most commonly by tying their value to the price of a traditional currency/fiat currency such as the US dollar, euro, or Chinese yuan. Meta attempted to issue a stablecoin called Libra, later renamed Diem, which was shut down in 2022. BRICS countries have been eager to issue a stablecoin based on a basket of fiat currencies since 2017. Tether launched #BRICST last year at BRIC summit, a BRICS stablecoin alternative to the USD and USDT, pegged to the Chinese yuan, offering 10% annual returns to meet this demand.

Tether is the largest cryptocurrency in terms of trading volume, with 64% of the market share among stablecoins. After overtaking Bitcoin in 2019, USDT has become the most traded digital asset in the world. As of May 4, 2024, Tether had over $110 billion, 36 million euros, 20 million yen, 19 million Mexican dollars, and 246,000 AUDT in circulation, raising concerns that it could pose a systemic risk to digital asset markets and threaten the stability of broader markets. financial markets.

Tether is generally considered safe for investment, primarily as a means to hedge against the volatility of other digital assets. However, like any investment, it carries risks, and it is essential that investors consider Tether’s efforts to maintain a fully transparent company, publishing a log of current reserve activity on a daily basis, and strengthening regulatory compliance in collaboration with international regulators.

4) As the most traded digital asset, Tether is inevitably used in illicit transactions. According to TRM Labs, USDT was connected to $19.3 billion in illicit transactions in 2023 and was the most used stablecoin for criminal activity in the cryptocurrency industry last year. Do you have any comments on the illicit use of Tether?

As of December 1, 2023, Tether is working with law enforcement and regulatory agencies by introducing a voluntary wallet freeze policy. Bind offers secondary market controls to freeze transactions associated with individuals listed on the US Office of Foreign Assets Control (OFAC) Specially Designated Nationals List (SDN). This list includes companies and individuals controlled or owned by sanctioned countries.
Recently also Tether announced its partnership with blockchain surveillance firm Chainalysis to monitor transactions with its tokens on secondary markets. The monitoring system will help Tether identify risky crypto wallets/addresses that could be used to circumvent sanctions or engage in illicit activities such as terrorist financing and illicit transfers.

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