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Blockchain won’t fix financial markets, law professor tells Congress – DL News
- The so-called tokenization of real-world assets has generated a lot of hype in recent years.
- Its supporters say it automates inefficient processes in financial markets.
- But those benefits could be achieved with technology better than blockchain, Hilary Allen, a professor at American University Law School, said Wednesday.
Wall Street giants – from investment banks like JPMorgan to the world’s largest asset manager BlackRock – tout the benefits issuing and processing securities on-chain.
These companies say the so-called tokenization of assets, from stocks and bonds to art and real estate, will automate currently inefficient and error-prone operations in financial markets.
However, all of these benefits could be achieved with other types of ledgers and databases than blockchain, a finance academic told Congress on Wednesday.
“Crypto runs on public blockchains without permission, and tokenization doesn’t need to,” said Hilary Allen, a law professor at American University Washington College of Law.
Allen was testifying at a hearing convened by the House Subcommittee on Digital Assets, Financial Technology, and Inclusion to debate whether tokenization would facilitate efficient markets.
“Blockchains suffer from unavoidable inefficiencies and operational fragilities that make them unsuitable as supporting infrastructure for real-world assets.
— Professor Hilary Allen
Consensus concerns
Wall Street has been dabbling in tokenization for years, primarily – due to competitive and regulatory concerns – on closed, so-called “permissioned” blockchains.
However, more recently, banks have started testing the capabilities of public blockchains like Ethereum.
The problem is that these blockchains “suffer from inevitable inefficiencies and operational fragilities that make them unsuitable as supporting infrastructure for real-world assets,” Allen said.
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For example, consensus mechanisms – protocols for bringing nodes on a blockchain to agreement to verify transactions – are inefficient and unnecessary, she said.
This is often intentional – many blockchains have built-in deadlines, for example – but it means they can’t process large volumes of transactions.
Additionally, governance is an issue.
Global financial markets operate on centralized databases that are monitored for cybersecurity and operational risks, and which are subject to strict controls, rather than by unregulated and sometimes anonymous lead developers.
When financial companies experiment with blockchain, they often solve these scalability and governance issues by recentralizing control of certain processes, Allen said.
But this begs the question: “Why use public, permissionless blockchain in the first place?” ” she asked.
Allen also took aim at tokenization projects’ assertion in their marketing: they democratize finance by offering fractional ownership of assets typically inaccessible to ordinary Americans.
“I urge you not to pin your hopes on tokenization as a way to improve financial inclusion,” she said.
“With so many Americans living paycheck to paycheck, the problem is not a lack of investment opportunities, but a lack of money to invest in the first place.”
Better rules
Allen sounded the only skeptical note during the hearing.
Other witnesses represented companies exploring or actively involved in processing tokenized securities.
These witnesses called on Congress to ease legal and regulatory barriers to tokenization.
“Existing laws and regulations were not designed with blockchain in mind,” Carlos Domingo, Securitize co-founder and CEO, told lawmakers.
Securitize is the transfer agent for BlackRock’s tokenized fund, BUIDL.
Among other measures, he called for improvements to the Securities and Exchange Commission’s licensing regime to allow brokers to protect digital assets.
The SEC introduced a special broker license for this purpose in 2021.
However, Domingo said, it is “extremely difficult to achieve, limited in scope, and unclear which tokenized titles are eligible” for licensing.
Email the author at joanna@dlnews.com.