'We could lose our edge': Bankers on competing for digital assets

• Key insight: Banks need to move forward with tokenized asset projects, or lose customers to competition that's already ahead.
  
• Forward look: Traditional financial firms can start by creating digital wallets, designing smart contracts and building guardrails, experts said.

Leaders of banks and Wall Street firms said traditional financial firms need to move forward with tokenized assets or lose out to more nimble competitors.
Sandy Kaul, head of digital assets and innovation at Franklin Templeton, noted that in the financial industry, firms have innovated from within. 

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"But innovation is now coming from new quarters," she said at American Banker's Most Powerful Women in Banking Conference this week, during a panel moderated by Holly Sraeel, senior vice president of strategy and content for live media at American Banker. "Innovation in payments is coming from startups in the fintech world. Innovation in digital assets is coming from crypto firms that have been building natively on blockchain for almost a decade now. So there are new sources of competition that are coming, and those new sources are not constrained by many of the same limitations of legacy technology, legacy thinking and legacy management that we have grown very used to from operating within the system."

Banks have to become more nimble "and understand that we could lose our edge, we could lose our position in the marketplace if we do not respond appropriately," she said.

Tokenization has brought change to financial services in three ways so far, she said: Intraday repo, tokenized collateral that can be moved 24/7 and cross-border payments.

"Intraday repo is one of the fastest-growing areas in the marketplace," Kaul said. "We all use repo for financing. It is a key part of many organizations' daily activities, but we have always operated in a world of overnight repo. But now we are seeing that move to intraday. So we are seeing a foundational shift in the way that financing is working and the way collateral is working."

Collateral is becoming tokenized, she said. Franklin Templeton's tokenized money market fund is used as collateral on more than 90% of crypto derivative exchanges. This month, the Depository Trust Company is launching its collateral AppChain, which will connect central securities depositories across the world to enable real-time, 24/7 movement of collateral, which will increasingly be in tokenized form. 

And corporate treasury customers are looking to use stablecoins and tokenized deposits for cross-border payments to improve response times and speed. 

"Those three use cases are transforming the way we work every day, and they're just the tip of the iceberg of what's coming," Kaul said.

Lisa Farkovits, managing director and head of model and AI risk management at Barclays, said banks need to keep up so they're competitive, but they also need moats around their data.

"You can't slow down the rate of innovation at the firm so much that it becomes anti-competitive," she said. "Because then that winds up being a negative driver of growth and puts your firm at risk. And then we also have to make sure we have the right guardrails to make sure that we can operate safely in the environment."

Compliance will have to be different with the increase in digital asset offerings, said Natasha Barrientos, head of digital assets, global payments and liquidity at Wells Fargo.

"Regulators don't want to see or hear, 'We already have these checks. We already have these controls. We're just copy-pasting it for digital assets,'" she said. "No, that ain't gonna fly. You need something specific. You need to be able to understand the unique risks that come with this technology and you need to have those controls in place specifically for these new processes and changes that blockchain will impact."

Banks that want to offer digital assets need to have a digital wallet, Kaul pointed out.

"We are used to working in a world of accounts," she said. "Accounts get replaced by wallets. If your organization does not have a wallet strategy at this point, you're already behind. And if you are not deployed on your wallet strategy by 2028, you are going to be falling increasingly behind at a more rapid pace."

With a wallet strategy, banks also need a chain strategy, she said. "Which blockchains are you going to actually be connecting to?" Every chain has its pros and cons: "We have had to develop a very extensive blockchain evaluation criteria, and we have had to go to some of the most brand-name chains in the world to get them to upgrade things to be able to support an enterprise client."

The blockchains also need to create smart contracts for digital assets that have defenses built in, "because these systems are operating in real time, and your teams don't have time to react," she said. "They need to be trusting that the technology is implementing the rules in a way that they are comfortable with."