Shared from the 11/30/2023 Financial Review eEdition

Laying building blocks for digital assets


While cryptocurrencies remain firmly in the spotlight, corporate attention is turning to the many broader uses of the underlying blockchain technology to streamline business processes and unlock new revenue opportunities.

As a distributed ledger, blockchain means that ownership records can’t be altered or tampered with. In turn, the technology facilitates tokenisation: the conversion of assets or ownership rights into digital form.

Blockchain already has had an impact on industries ranging from healthcare and real estate to gaming and sports and – notably – the financial services sector.

In theory there’s little that can’t be tokenised, including art, vehicles, shares and commodities. Tokenisation also allows for fractional ownership of a high-value or illiquid asset, such as property.

“Some of the benefits realised by early adopters include reduction in settlement times and products for connecting borrowers and lenders that were once not possible,” says digital asset infrastructure provider Fireblocks.

The company reports that, between 2022 and 2023, demand for tokenisation projects increased by 350 per cent.

But while asset digitisation promises to transform financial markets, it also poses challenges including regulatory uncertainties, technological hurdles and – ultimately – the need for market acceptance.

Fireblocks co-founder and chief executive Michael Shaulov says legacy systems are failing to keep up with the speed and volumes of the modern payment flows – and are thus ripe for disruption.

He adds that people are familiar with the “crazy failures” in the crypto space, such as FTX founder Sam Bankman-Fried being found guilty of defrauding investors of $US8 billion.

Shaulov says such failures are due partly to improper risk management, as well as the lack of a prudent corporate governance structure or proper segregation of customer assets.

“The exchanges were for ‘new’ assets, but in terms of how they operated there was nothing to remove counterparty risk and heighten transparency,” he says.

“They were not using the technology in the way it was intended.”

Fireblocks itself was founded because of an infamous 2017 fraud, in which the Lazarus Group hacked into four South Korean exchanges and stole $US200 million of Bitcoin.

Working on the ensuing investigation, Shaulov was struck by how quickly cybercriminals moved from hacking traditional finance to digital assets.

Shaulov and fellow software engineers Idan Ofrat and Pavel Berengoltz created Fireblocks as an enterprise-grade platform to protect digital assets from theft and hackers.

“Fireblocks’ mission is simple: to enable every business to easily and securely support digital assets and cryptocurrencies,” Shaulov says. Currently, Fireblocks services about 1800 institutional customers globally. More than 60 of these are Australia-based, including ANZ, National Australia Bank and the crypto exchanges Independent Reserve and Swyftx. Fireblocks also worked with the ASX-listed DigitalX wholesale fund manager to provide wholesale investors with simplified and secure access to digitised ‘‘real-world’’ assets. Fireblocks recently acquired BlockFold, a Melbourne-based start-up which helps financial institutions tokenise their offerings. While the client base remains weighted to financial institutions, Fireblocks is working with consumer brands and gaming companies to revolutionise loyalty and marketing initiatives. The company helped beverage giant Heineken to pilot a non-fungible token (NFT), enabling consumers to receive incentives and rewards on the blockchain with ease. The ‘‘gamified’’ digital experience allows Heineken to collect data shared by the consumer, as well as enabling bars with loyal patronage to work more closely with the brewer. In the financial sector, Fireblocks helped ANZ issue its stablecoin in March 2022. (A stablecoin is a crypto whose value is pegged to a currency or commodity and thus has a more consistent price).

Since then, Fireblocks has delivered more than 10 stablecoin projects and is in “active conversations” with more than 25 banks.

This week Fireblocks launched Off Exchange, which allows institutional traders to eliminate counterparty risks when trading on centralised exchanges.

Counterparty risk can take on many forms, such as cyber hacks, bankruptcy, co-mingled accounts and – as with the FTX collapse – client fund misappropriation.

Within 72 hours of the FTX failure, $US10 billion of funds was moved to Fireblocks.

Off Exchange is built on the Fireblocks Network, which has secured the transfer of more than $US40 billion between institutional traders and exchanges in the last 90 days.

The Off Exchange initiative follows the launch of Fireblocks’ non-custodial wallet, which gives the end-user full control over their wallet and their transactions.

“The idea is that as a customer or investor, you can safeguard your own funds without relying on your financial provider or maintaining around-the-clock visibility,” Shaulov says.

With 600 employees globally, the New York-based Fireblocks has ensured the safe transfer of $US4 trillion in digital assets and created more than 130 million wallets.

Shaulov has been impressed by the willingness of Australian financial market players – especially the banks – to adopt the brave new world of digital assets. The firm participated in the pioneering digital currency pilot undertaken by the Reserve Bank of Australia, providing tech for the seven out of 16 use-cases explored.

“However additional work is required for Australia to reach the next level,” he says. “Regulators need to work closely with the financial sector and digital asset companies to enable the full benefits to be unlocked.”

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