Since the dawn of civilisation, people have been meeting to buy, sell and trade goods creating a globally interconnected market that feeds into everything from politics to town planning.
Over the millennia, this market has developed from simple bartering to today’s “always on” operation as society demands money and goods change hands almost instantly – and it doesn’t seem to be slowing down.
Within finance, capital markets are expected to move with the times, too, as businesses face demands to design, launch, sell and deliver more quickly than ever before – and they need investment to do it.
This means that banking and finance faces relentless, significant transformation to an increasingly digitally native world, while still having to work with systems designed for an analogue age.
Step one has been to get up to speed with the ones and zeros of binary coding and digitising processes to capitalise on efficiency by reducing human error.
For step two, a more profound and professional rethink is required. The challenge now is to drag centuries-old practices that remain focused on the base challenge of raising capital towards methods dreamed up closer to Palo Alto than the City of London or Wall Street.
Happily, some proponents have already started. Instead of trying to pour new wine into old bottles, they are researching, planting and tending the vines that will produce the new vintages of our tokenised future.
Origins
Julien Clausse is head of AssetFoundry, the tokenisation and digital assets platform launched by BNPP Paribas. He works for the Corporate and Institutional Banking arm, or CIB, and has a team building the infrastructure and technical products to support the capital markets of the future.
Clausse has worked in banking since 2018, after starting his career in tech and innovation. He believes the new era of finance and capital markets needs a balance of skills and backgrounds to succeed.
“On my team, I have people with a technology or product management background, and we are working hand-in-hand with the business lines and functions such as legal, compliance and risk,” he says.
“All the technical people need to have a steep ramp up on the functional aspects on the business side so they can understand what it means from a business standpoint.”
It’s the same for product people.
“I want them to understand what the technology is. If you don’t understand the technology, you miss something on the business side and vice versa,” he says.
First of all, Clausse and team learned about the emerging technology, its impact on the business and operations, the opportunities, and what is still missing so they could choose the right thing to work on.
For the moment, BNP Paribas is looking at three types of assets: bonds, fund shares and digital cash. Crypto is not on the agenda, Clausse tells Capital Pioneer, but top of this to-do list is digital cash.
“The digital cash leg is very important in a digital or tokenised economy, because it’s the settlement leg,” says Clausse.
“You need something to settle against. The benefits of blockchain, thanks to cryptography, is to have this atomic or quasi-atomic settlement that reduces the risks.”
The Paris-headquartered bank’s current strategy is to work with central banks and regulated central bank digital currencies to be close to the action but also be “learning by doing”.
In 2024, the team had significant successes with the European Central Bank.
“We tested all three setups provided by Eurosystem — Banque de France, Bundesbank and Banca d’Italia,” says Clausse, whose team was responsible for all the connectivity to these solutions for delivery vs payment use cases.
The programme explored three payment solutions, conducting real transactions with Neobonds, BNP Paribas’ private tokenisation platform leveraging Canton blockchain, and test transactions with AssetFoundry, its Ethereum-based platform.
Among other use cases, the bank arranged and placed the first Eurozone sovereign digital bond for the Republic of Slovenia.
The €30m issuance was followed by secondary market activity with AXA Investment Managers on behalf of AXA
France, Banque de France and the European Investment Bank.
So far, so satisfactory, but for Clausse, these use cases are just the gateway to what digital markets could do – and there’s a lot on offer.
“The promise of blockchain is that these rails are super-efficient, 24-7, programmable, and highly secured, and all the transactions are recorded in an immutable way. But there is more,” he says. For Clausse, “more” means an entirely new infrastructure.
“There might be multiple new rails – several rails for securities and several for cash,” he says. “It’s already happening with wholesale Central Bank Digital Coin (CBDC) experiments on specific rails, managed by central banks and regulated stablecoins on public blockchains, with different usages and focus.”
Major asset managers are already turning their attention to money market funds, too, where multiple rails are being built. Some operate on private rails, like AllFunds, whereas BlackRock is issuing money market funds on public rails with public Ethereum.
For Clausse, this is the start of the revolution that will upend traditional capital markets.
“You can start to have compatibility, meaning that some assets and smart contracts on these rails can interact with others, provided they share similar technology stacks,” he says.
“The whole question is where the volume will be, hence ensuring liquidity, but also for which kind of assets and what’s coming next.”
Buy side take up
The key ingredient for capital markets is, and always has been, the investor. To get those with the money to part with it, the new system needs to offer more than the old one – and it is up to the market to build something
they want.
“For the investor, it’s just a token,” says Clausse. “What they care about is that it’s traded in real-time and risk-free.”
Once in place, a tokenised system will allow investors to directly access their asset once it’s acquired –
but we are a while away from this being commonplace.
This means, according to Clausse, that there are currently two types of investors, “the ones who are willing to explore and have already acquired some security tokens and the others who are just waiting”.
“The first group have also found that – for the moment – it was more complex than acquiring a standard asset for the equivalent type of assets, but they’re willing to understand because they want to anticipate these models,” he says.
The other group will be happy to buy financial products with these features once it’s all been delivered and tested (by someone else), and Clausse thinks the rubber will soon hit the road.
“We are close to the end of experimentation phase,” he says. “As of 2024, pretty much all the major players have tried new things, so now it’s time to build — but how do we scale?”
New market environment
This is the $10trn question the entire industry faces. There’s no time for the usual measured, organic growth and development that has pulled capital markets through its history. Nor is there one regulator or policy overlord in charge to decide, test and implement. The market, it seems, needs to figure this out on its own.
“To me, it’s a business architecture evolution towards a network on which you have tokens as smart contracts for assets to which everybody can connect,” says Clausse.
“If you’re part of the network, you have access to it and can provide services on top of tokens on that network.”
For Clausse, who has led BNPP’s Asset Foundry since September 2022, within this new environment there are three layers, upon and within which are specific and separate entities all playing their part.
“The lowest layer is the infrastructure – the network,” he says. “Basically, it’s a technical set of nodes operated by a set of participants operating a network. This network infrastructure should be as open as possible to ensure liquidity and composability.”
The second layer is the token itself. “You can deploy tokens representing a bond or another asset, and that’s tokenised and deployed by private entities. This token should be fully compliant with regulations and permissioned.”
The third layer is the services on top of the token, which are provided by another, broad set of entities. In this scenario, Bank A could provide a service on a token issued by Bank B, because the token is accessible on the network.
The entity developing the underlying technology for the tokens and services, and the smart contracts, is likely to be responsible for developments, he says.
“At the moment, the community is building, but the objective is to be able to access various networks, interact with these tokens and provide services; then banks can compete on the services they offer,” says Clausse.
This broadly echoes what happens in today’s analogue world, but much more slowly and with more human error. However, institutions are focussing on building their own tokenisation capabilities, says Clausse, noting that this is the important first step towards evolution.
“Today, the institutions that tokenise have an advantage. They can decide their token format, because there’s no standard, so basically you can anticipate the services that they can provide,” he says – noting that in a few years’ time, “tokenisation will probably become a commodity”.
Not so fast
“The biggest challenge we’re tackling is about the shape, build and operation of the network infrastructure,” he says.
“It’s pushing the whole ecosystem to think really about the models, while complying with competition law rules, and there are lots of possibilities.”
One option is for a technical provider to deliver a network that is operated by a set of players — it could be a financial market infrastructure operator. The market could even leverage the blockchain model with governance tokens, notes Clausse.
“How it operates, what’s its governance, what’s the setup is another question,” he says. “Who are the players building this network is another. Is it a public network that we leverage? Because, if so, that’s already available. We can deploy tokens that are permissioned.”
The final shape may be hewn from a bottom-up approach, growing from real use cases, when there are enough assets on the network, which hasn’t happened in finance or any other big business since regulators got involved many centuries ago.
“What usually happens in an industry is top-down,” says Clausse. “In this case, it’s complicated because you’ve got many players in the value chain and legal and regulatory landscapes are fragmented. It also depends on the region, but even in Europe, there is fragmentation between countries.”
With a CV showing elements of entrepreneurship, with at least one mention of a moonshot, Clausse believes the market usually decides on the best way forward. Because of this, he encourages people to look at what’s happening around them for guidance – noting that the starting gun was fired for the digital asset revolution way outside of traditional finance.
Why now?
“It all started with crypto” says Clausse. “It changed the way people thought about and interacted with value.”
As controversial as cryptocurrencies and related other assets have been to many, the underlying technology offering a direct and secure transfer of value was a watershed moment.
“It’s a structural and societal evolution — the same way the internet started and has changed the world of information and services,” says Clausse. “Banking and finance have to be part of it.”
The three major advantages are irrefutable, according to Clausse.
Blockchain brings risk-free settlements, which is a game-changer to financial markets. If the cash and security are not both evidenced through the cryptography, the trade doesn’t happen.
Programmability is also a massive step forward, enabling bonds to automatically pay coupons, for example, rather than rely on manual processes.
“The last one is transparency, allowing everybody connected to the network a view, if they
are eligible, on the assets,” says Clausse.
“You can distribute this data directly from origination to the whole value chain, which will help in many ways.”
There is clearly a benefit for ESG and sustainability visibility and reporting, but that is just the start.
“We can now add multiple cryptographic signatures to the token so data can be clearly updated and accessible in real time,” he says. “To progress, it’s about combining the right use cases and the availability of digital cash.”
Money market funds, which are tied to cash needs, are already gathering ground, with some of the largest players in asset management deeply involved.
Within fixed income, Clausse’s team has already worked on corporate bonds with energy company EDF to allow investors to see, in minute detail, where their capital was being deployed.
“With EDF, we looked at objects where tokenisation brings value immediately,” he says. “Traditional capital markets and DCM [debt capital markets], still work perfectly well. You can always improve but changing the infrastructure is a huge cost. It is therefore key to find the right use cases where tokenisation bring strong added value, and not just marginal added efficiency.”
He realises that 100% of capital markets will not – in the short to medium term at least – move onto a digital platform, so a hybrid model will be in place for some time.
“But the same way the stock market was paper based a century ago, eventually it could happen. If these rails are put in place and there’s a market using it, everything could move slowly and steadily to that format,” he says.
“For many decades, we will have both. But if these assets move onto blockchain and you’ve got instant settlement, it’s very likely that the buy side will ask for these kinds of assets rather than the equivalent traditional ones – if they have the right infrastructure and partners.”
Key challenges
As with the analogue world, the key to overcoming challenges is working together and the main stumbling block to doing so is the same in tokenised future: standardisation.
“A token is a token, but if what you put in there is not comparable to something else, you have fragmentation at the data level, which won’t work for investors,” says Clausse.
“Interoperability, or connecting too many different networks together, won’t fly. It’s just too much work,” says Clausse. Instead, the market needs to think about shared infrastructure, then it can compete on the token creation, where standardisation will be vital.
“It doesn’t matter if a token has been issued by Company X on Network Y if there is a common minimum data
standard for what is on there and the fields it covers,” he says.
And then there’s the security and reliability of this data.
“Blockchain is good for making sure that transactions are trustable, but it’s about the transactions, not the data written in the blockchain. That means that any time you onboard an asset onto a ledger, you’ve got to make sure it’s AML- CFT compliant etc. So, there is still significant work off the chain,” he says.
And this can’t happen overnight.Having already worked with the ECB, Clausse notes how the area is very important topic for many governments around the world, “and they’re willing to help and make things happen in their specific jurisdiction”.
At any given moment, there are ongoing programmes, tasking the industry to build the use cases where it makes sense.
“There could be some things that accelerate – or not,” he says. “But it’s not a technological play, it’s an ecosystem play, and we’ve been talking to everybody in the industry. It’s a strategic topic for BNP Paribas and it’s important to others as well.”
In an industry as competitive as banking, everyone is experimenting, building solutions, considering different models – some with more visibility than others.
“It takes time and resources each time we want to connect to a network, so we want to make sure we connect to the right one,” says Clausse. Some of the networks BNPP is testing will fit the bill, others won’t, but building the infrastructure capability and connecting it is the bare minimum, he says.
“If we’re able to do that, provided we’ve selected the right technologies, which are the ones that are going to be deployed, then we can test whatever we want later on or build whatever we want,” he says.
For Clausse, it’s a 20-year process, which started 10 years ago, meaning we are smack-bang in the awkward
middle years of transformation.
“This infrastructure is being built as we speak,” he says. “We don’t know yet what it will look like because many things are still in discussions. But in the next couple, maybe three years, it’s going to happen.”
