The Clearing House Real-Time Payments Tracker May 2024 Banner

FDIC Vice Chair: Tokenization ‘Beginning’ to Deliver Benefits  

Blockchain is full of promise, cryptocurrency perhaps less so, and tokenization is already shifting what it means to “own” an asset.

In a speech delivered this week by Travis Hill, vice chairman of the Federal Deposit Insurance Corp. (FDIC), at the Mercatus Center, the call was for regulatory “clarity” on technology, its uses, and especially “what we consider safe and sound.”

He took issue with his own agency’s approach, stating, “But there are significant downsides to the FDIC’s current approach, which has contributed to a general public perception that the FDIC is closed for business if institutions are interested in anything related to blockchain or distributed ledger technology. … The confidential nature of the existing process means there is little public information on what types of activities the FDIC might be open to, if any.”

In reference to regulations governing crypto, he said that requiring banks to keep them on balance sheets as liabilities effectively dissuades banks from expanding their operations to provide more crypto-related services and products, as their capital requirements are affected.  

The on-balance-sheet designation, Hill said, “makes it prohibitively challenging for banks to engage in this activity at any scale. It is worth asking whether it is in the public interest for one crypto exchange to provide custody services for most of the market in approved bitcoin exchange-traded products, while highly regulated banks are effectively excluded from the market.”

PYMNTS Intelligence found that a minority of traditional FIs have embraced crypto fully: 5% of credit unions offer crypto investing services, and only another 5% plan to offer investing services tied to these digital holdings in the current year. Meanwhile, just 1% of banks offer cryptocurrency, and another 1% plan to do so.

Tokenization’s Promise

Hill’s remarks delved into tokenization, which he said, “transforms the way ownership of assets is recorded and enables far-reaching new functions.” And through the use of blockchain, he said, commercial bank deposits, government and corporate bonds, money market fund shares, gold and other commodities can “improve the way we transfer value” by operating 24/7/365.

Tokenization is already beginning to deliver benefits, Hill said, smoothing and speeding settlement times for multicurrency bond issuance.  

“In the future, the benefits could expand to retail; to give one example, programmability may be able to simplify the homebuying process by eliminating the need to place funds in escrow prior to closing,” Hill said.

In an interview with PYMNTS last year, Mastercard Chief Digital Officer Jorn Lambert said, “The true intrinsic value of blockchain, which is around programmability of transactions, immutability of transactions, and the ability to do delivery versus payment and always-on types of payments, has yet to be unlocked.”

The Federal Reserve estimated in a paper published last year that the value of tokenized assets on permissionless blockchains stood at more than $2 billion as measured in May.