From rejection to adoption: why finance has converted to public blockchain

If we go back a few years, the choice of opting for a public blockchain (such as Ethereum) was something of a dizzying prospect for the major financial institutions.

You have to understand them: using a decentralised network is akin to losing sovereignty over their business and a great leap forward in transparency. A sort of Copernican revolution, especially for these structures used to managing their own traditional networks, despite the sometimes exorbitant operating costs and their slowness.

It is no coincidence, moreover, that the first experiments by banks were initially conducted on private blockchain, i.e. in a closed network, as evidenced by the grouping around the R3 consortium, which from 2017 brought together institutions such as Barclays, BBVA, Credit Suisse, Goldman Sachs, JP Morgan, Société Générale or BNP Paribas.

"At the time, the little experimentation that took place on public blockchain often boiled down to sending transactions to oneself," quips a French banker.

Three main reasons justified this choice

👉 Regulations, particularly in terms of compliance with the fight against money laundering. Banks are obliged to know which counterparties they are interacting with, which was far from obvious on an open infrastructure like Ethereum, based in particular on the principle of pseudonymity.

👉 The energy cost of blockchains.

👉 Reliability that remained to be proven. While Ethereum has proved its resilience over the years, it was natural to be wary when it debuted in 2015.

"But things are changing," explains Paul-Adrien Hyppolite, co-founder and CEO of Spiko, a French start-up currently in the process of being accredited that is exploiting blockchain to create an open source platform for issuing, managing and distributing financial securities.

"In addition to its robustness, Ethereum has sent a strong signal to the market with its consensus change begun in 2022, which now allows it to expend very little energy," explains Éliézer Ndinga, head of strategy and development at 21Shares, one of the asset managers to have a ETF Bitcoin Spot in the United States.

In fact, Ethereum operated with a proof-of-work algorithm until that date, closing the door to large companies constrained by their CSR (corporate social responsibility) objectives. A shortcoming that is now a thing of the past since the switch to proof of stake, which has reduced its carbon footprint by more than 99%.

Victory for public blockchain

"Traditional players have also understood that blockchain is an interoperable and transparent distribution network that gives access to a global audience," explains Éliézer Ndinga. "And all this is done in addition by considerably reducing the number of intermediaries to distribute a product," he continues.

"More and more of the institutional players we work with are betting on a financial system connected between different interoperable public blockchains," agrees Zakaryae Boudi, CEO of FeverTokens, a start-up specialising in the design and securitisation of smart contracts. FeverTokens works in particular with the interbank network Swift, Société Générale-Forge, Crédit Agricole CIB or Engie.

Proof that the adoption of blockchain by major financial institutions is on the way, on 21 March BlackRock launched the "BUIDL" tokenised money fund (BlackRock USD Institutional Digital Liquidity Fund) on the Ethereum blockchain, which has raised nearly $300 million to date.

And the world's largest asset manager ($10 trillion under management) is not expected to stop there. According to its documentation, BlackRock could issue other types of financial securities in the same way on other public networks.

Permissioned products have offered a catalyst

To satisfy regulatory constraints, proponents of traditional financial players entering the blockchain have in recent years developed "permissioned" products, i.e. assets or protocols that require authorisation to access or be acquired and/or traded.

"While decentralised finance (DeFi) brings a more open and trustless vision of finance, each product must face regulatory realities," Steakhouse Financial points out in an analysis article dedicated to BUIDL. Steakhouse Financial is a company that advises decentralised autonomous organisations (DAOs) such as MakerDAO, Lido or Angle Protocol.

The euro stablecoin CoinVertible from SG-Forge, Societe Generale's blockchain subsidiary, also works this way: only a handful of players who meet the bank's compliance standards can use it. "It was mandatory for a group like ours," explains its CEO Jean-Marc Stenger.

At the end of the day, authorised entities can take advantage of a settlement asset directly on the blockchain, without jeopardising the bank's compliance rules. This device is similar to the ERC-3643 developed since 2018 by Tokeny, a Luxembourg tokenisation platform that works with institutional players.

"Our standard makes it possible to impose usage rules on the tokens issued, which is very interesting because it brings control even though we are on a public blockchain," says Luc Falempin, Tokeny's boss.

Same tone of voice at Franklin Templeton, one of the American giants of asset management. "For us, the future of finance lies on the public blockchain, where permitted protocols and products will multiply in order to comply with regulations," explains Greg Scanlon, managing partner of its venture capital arm.

DeFi projects have natively integrated the needs of TradFi

The worlds of decentralised finance (DeFi) and traditional finance (TradFi) are no longer staring each other in the face, and the former intends to respond to the demands of the latter to take the sector to the next level.

The most representative example is illustrated by the Morpho Blue project, which allows any entity to create its own decentralised lending and borrowing market with its own rules. Launched in January this year, this protocol developed by Morpho Labs of France has already succeeded in attracting more than a billion dollars in liquidity.

"The à la carte parameterisation should meet the needs of financial institutions, which will be able to limit access to liquidity pools to regulated participants, so there is no risk of funds being mixed with those of players whose identity they do not know", explains Paul Frambot, boss and co-founder of Morpho Labs.