Over the last few years, financial institutions around the world have embraced tokenization for capital market asset management. Kelvin Li, Head of Platform Tech and Jessica Cao, Head of International Financial Institutions Partnerships at Ant International, discuss how distributed ledger technology can be leveraged with tokenized assets to enable interoperability.
Tokenization as a concept can have different meanings. In the domain of payments and settlement, it typically refers to the integration of new technologies to either expand their capabilities or improve their performance through distributed ledger technology (DLT). According to a 2024 McKinsey report, the tokenized asset market is projected to grow to $1.9T by 2030, with tokenized deposits projected to reach a market capitalization of $1.1T and other assets classes making up the remaining $0.8T.
The nature of tokenized deposits could inherently lend itself to facilitate near real-time in a cross border environment. The current offering of tokenized deposits is bounded by a single platform or issuer, while cross border payments entail different currencies and payment systems. This means that tokenized deposits would need a way to be exchanged to ensure the transfer of funds from one jurisdiction to another can be completed end-to-end.
Considering its potential to revolutionize cross border payments, leading industry players are working towards an interoperable tokenized asset ecosystem that could address these challenges. One solution could be a token exchange model enabled by liquidity providers. While liquidity provision is not a novel concept, innovation in the Web 3.0 space, by platforms such as Uniswap, significantly popularized and advanced the concept by making liquidity provision more accessible. In the regulated world, a similar model can be borrowed to incentivise liquidity provision.
At a mature stage where token types are no longer a barrier to payments, we then can reap the benefits of DLT to enable lower costs, real-time atomic payments, more efficient reconciliation and more secure transmissions, bringing about the next evolution of cross border payments.
Enabling Liquidity Providers in Token Exchange
Liquidity providers would play a key role in facilitating cross-issuer or cross-currency tokenized deposit transfers. In this context, the liquidity provider would perform the token exchange and provide the price quotation for different token pairs. Leveraging smart contracts, the liquidity provider can perform on-chain fulfilment of the token swap, ensuring transparent, immutable and secure transactions to occur in real-time. In addition, programmability embedded in the tokens, such as conditional payments, would be able to enhance transaction efficiency and flexibility. For example, conditional payments can automate processes such as releasing funds only when predefined conditions are met, reducing the need for intermediaries for lower cost and mitigating risks of disputes. This programmability can also enable features like automated compliance checks, escrow arrangements, or milestone-based disbursements, all of which can streamline operations.
While liquidity providers are rewarded with liquidity cost and price spread, the entry of more liquidity providers will unlock additional liquidity. Additionally, liquidity providers could exchange tokenized deposits with each other, creating a more robust and interconnected liquidity network. This would further enhance market efficiency by enabling seamless transfers and price discovery across different currencies and platforms.
We do recognize the potential drawbacks of this structure, such as the risk of liquidity fragmentation, as liquidity providers would need to separately fund both fiat and token accounts. This could lead to higher costs and, consequently, less efficient price discovery. However, this structure can be more inclusive compared to existing payment services, potentially driving higher efficiency in cross border payments from end to end.
Ant International’s Multi-Currency Tokenization Deposit for FX Payments
At Ant International, due to the global nature of e-commerce transactions, we initiate and receive payments around-the-clock in multiple jurisdictions. We are piloting an approach for a deposits token exchange model. Partnering with a liquidity provider, we facilitated cross border payments by leveraging banking partners to provide off-chain FX pricing through Price Oracle. The tokens used to complete the cross border payments were denominated in different currencies and by different issuers. We found that the token exchange model was a potential solution for cross border payments using tokenized deposits and intend to scale up this usage in the future.
With the tokenized asset market and global business-to-business payments market set to increase exponentially in the coming years, financial institutions have started to review and enhance their existing solutions and infrastructure to ensure they are strategically positioned to support this growth. But one asset class or a single financial institution alone will not make a big enough impact.
In order to enhance cross border payment solutions across the entire industry, public-private collaboration still remains key, through industry-wide initiatives. We have already seen a number of forward-looking central banks and regulators launch such programs, which are still ongoing. These projects will not only help to advance existing technology, they also have the potential to enhance existing laws and regulations and ensure that the key users and beneficiaries of tokenization are protected.
