With the rapid growth of digital assets and the continuous innovation of blockchain technology, the financial market landscape is undergoing profound changes. In October 2024, TBAC's latest report delved into the impact of digital assets, especially tokenization and blockchain technology, on the U.S. Treasury market, analyzing its potential benefits, risks and future development trends.

1. Growth Trend of Digital Assets

The report points out that although the market size of digital assets It is still small compared to traditional financial assets, but it is growing at an alarming rate. As of 2024, the total cryptocurrency market value will reach US$238.5 billion, of which Bitcoin has a market value of US$136.4 billion and stablecoins have a market value of US$16.6 billion. Stablecoins have become the focus of attention due to their “stable value” and important role in the decentralized finance (DeFi) ecosystem.

2. The key uses of stablecoins in the digital asset market include:

1. Provide cross-chain transaction liquidity.

2. As the main collateral in DeFi.

3. Provide unregulated “deposit” functionality on cryptocurrency exchanges.

3. Tokenization

Tokenization is to represent assets in digital form and A process that runs on a blockchain or distributed ledger, which includes a core layer and a service layer. Tokenized assets have the following characteristics and advantages:

− Core layer and service layer: Tokenized assets integrate the "core layer" that contains asset information and ownership information ” and a “service layer” that manages transfer and settlement rules.

− Smart contract: Automated transactions are realized through smart contracts, and the transfer of assets and rights is automatically executed when preset conditions are met.

− Atomic Settlement: Simplifies the settlement process, reduces the risk of settlement failure and increases reliability by ensuring all parts of a transaction are completed simultaneously.

− Composability: different tokenized assetsThey can be combined to create new and more complex financial products to provide highly customized asset management and transfer solutions.

− Fractional ownership: Tokenized assets can be divided into smaller, more easily accessible shares.

4. Similarities between the digital asset ecosystem and the existing financial market

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5. Tokenized Treasury Bond Market

In the U.S. Treasury market, tokenized private and public projects include:

- Tokenized Treasury Funds: Examples include BlackRock’s BUIDL fund and Franklin Templeton’s on-chain money market fund.

- Tokenized treasury bond repurchase project: JPMorgan Chase’s Onyx platform uses tokenization to achieve intraday repurchase.

- Pilot projects: including cooperation between DTCC and the Bank for International Settlements (BIS) and other institutions to explore tokenized settlement methods.

6. Potential benefits and risks of tokenizing government bonds

Benefits:

1. Improved settlement and clearing: Tokenized treasury bonds support more simplified "atomic settlement", and all transaction parts involving treasury bonds can be settled at the same time, reducing the risk of settlement failure.

2. Optimize collateral management: Smart contracts programmed directly into tokenized treasury bonds enable more efficient collateral management, including when preset conditions are met The mortgage transfer is automatically executed.

3. Improve transparency and accountability: Unchangeable ledgers can provide higher transparency, reduce the opacity of market operations, and provide regulatory agencies and issuers with Provide real-time trading activity to investors.

4. Combination and innovation: Tokenized assets provide the basis for financial innovation and promote the development of new derivatives and structured products. Attract more small retail investors and emerging market investors.

5. Increase liquidity: Tokenization may create new investment and trading strategies through seamless integration and programmable logic; tokenized government bonds can be used in the blockchain Transactions are conducted 24/7 on the chain network, although doing so may have repercussions in both directions.

Potential risks:

1. Technology and security issues: The high level of distributed ledger technology Cost and cybersecurity threats may hinder its spread.

2. Regulatory and legal uncertainty: Cross-border legal differences and the unregulated nature of stablecoins bring uncertainty to the market.

3. Possible risks as the market expands:

− contagion risk

− Complexity and interconnectedness

− Banking/payments disintermediation

− “basis risk”

− Market manipulation and high volatility brought about by 24/7 trading

7. Tokenized Treasury Bond Market Framework elements and regulatory requirements

Framework elements:

1. Trust and interoperability: A unified or highly collaborative ledger system is needed to eliminate the "silos" in the current financial system.

2. Technology selection: Traditional public blockchain may not be suitable for the treasury bond market due to complex consensus mechanisms and security issues; a permissioned chain managed by a trusted institution is required Or private chain.

3. Core and service layer design: The core layer records asset information, such as ownership and custodian; the service layer manages transaction settlement and coupon payment.

4. Customer asset protection: Asset security and operational transparency are ensured through smart contracts.

Regulatory elements:

1. Legal and compliance: clarify the legal status of tokenized assets and solve the problem of cross-regional regulatory inconsistencies.

2. Financial stability: Develop rules to address liquidity risks and asset mismatches under market stress.

3. Transparency requirements: Improve transaction transparency and protect the rights and interests of investors through the regulatory framework.

4. Stablecoin supervision: Promote stablecoins to hold high-quality collateral, such as short-term treasury bonds, and be supervised by regulatory agencies.

Conclusion:

Although compared to traditional financial assets such as stocks or bonds, digital assets The overall market size is still small, but interest in digital assets has grown significantly over the past decade.

1. The growth of digital assets has so far generated negligible incremental demand for short-term Treasury bonds:

− So far, this has mainly been due to the increased use and popularity of stablecoins.

− Institutional use of “high-volatility” Bitcoin and cryptocurrencies could lead to increased hedging demand for short-term Treasury securities in the future.

2. Advances in DLT and blockchain are expected to establish new financial market infrastructure and improve operational and economic efficiency through "unified ledgers."

− There are multiple projects and pilots underway by private and public sector players to leverage blockchain technology in traditional financial market ecosystems, esp. DTCC and BIS projects and pilots.

− Central banks and tokenized dollars (CBDC) may be required to play a key role in the future of tokenized payments and settlement infrastructure.

3. The legal and regulatory environment needs to evolve with the advancement of tokenization of traditional assets.

4. Operational, legal, and technical risks need to be carefully considered when making design choices around technology infrastructure and tokenization.

− Research projects should include the design, nature and concerns of treasury tokenization, the introduction of sovereign CBDCs, technological and financial architecture choices, and financial stability considerations.

5. Currently, financial stability risks remain low given the relatively small market size of tokenized assets; however, strong growth in tokenized assets could lead to Increased risks of financial instability.

Tokenization technology provides the financial market, especially the treasury bond market, with the possibility to optimize settlement, enhance transparency and promote innovation. However, its rapid growth also brings challenges in terms of technology and financial stability. To realize its potential, it is necessary to gradually promote the large-scale application of tokenization through rigorous technological development, legal framework and regulatory measures under the leadership of a trusted central authority.