Larry Fink Says Tokens Are “The Next Generation For Markets”

The CEO of Blackrock, Larry Fink, recently said that tokenization will be "the next generation for markets”. If you think of tokens as bitcoinBTC or pictures of chimpanzees with sunglasses on, you might well think that the man who runs the biggest asset management company (with $7 trillion under management) is out on a limb. But if you think of tokens as digital assets that can be traded via protocols, you may well agree with me that his view is accurate, credible and inevitable. It may sound hyperbolic, but I am sure that the future will be tokenized.

Not Ideology, Economics

Mr. Fink’s perspective is not, I am sure, idealogical. His view of a new kind of financial market infrastructure of fungible and non-fungible tokens that are exchanged through decentralised financial services will provide “instantaneous settlement” and “reduced fees.” Tokens are bearer instruments. The token for $100 or for a seat at a Rangers game is either in my wallet, in which case it is mine, or it is in your wallet, in which case it is yours. When a token goes from my wallet to your wallet it is now yours. There is no clearing or settlement, no reconciliation and no question of authenticity.

The idea that tokens are central to the future of finance is not new to other serious players who understand financial markets. I interviewed Jonathan Larsen (as head of the Ping A Global Voyager Fund) on stage at Money20/20 Asia in Singapore a couple of years ago. He told me that tokens in finance is “a much bigger story than cryptocurrencies" and confirmed my suspicion that institutional strategies and scenario plans should be updated to take into account the new technology immediately. I remember Jonathan's focus on three key characteristics that he saw as driving the new asset class: transparency and universal access and the ability to reduce "frictional costs".

Reducing frictional costs, thus reducing the overall cost of financial intermediation in society, is a good thing for all of us. But that point about transparency is also very important. Last year the CEO of Goldman Sachs, David Solomon, who was similarly talking about using decentralized finance to reduce risk in the financial system said that the technology was about making the financial system more transparent. Fabian Schar, writing in the St. Louis Fed Economic Research Review on Decentralized Finance, similarly described an infrastructure based on open protocols with agreements that are enforced by code and transactions that are executed in a secure and verifiable way. They predict that such an infrastructure would be a highly interoperable financial system with "unprecedented transparency, equal access rights and little need for custodians, central clearing houses, or escrow services."

Transparent does not, of course, mean that everyone will be able to read everyone else’s data but it does mean that the new technologies will enable everyone to see that they can trust everyone else, the financial markets version of the difference between showing people your date of birth (bad) and showing people a credential from a regulated financial institution that states that you are over 21 (good). You can prove things about data without sharing the data, a concept I keep returning to because it is so central to both the universe and the metaverse. This could be implemented through zero-knowledge proofs, for example, a subject being explored by token researchers and developers worldwide.

Tokens, Transparency and Trust

Larry, Jonathan, David and Fabian are people who have forgotten more about financial services than I will ever learn, so I think we need to take their points about transparency seriously. The emerging regulatory environment for digital assets can be different from, and more efficient then, the existing regulatory environment. Using the techniques of cryptographic blinding, verifiable credentials, homomorphic encryption and so on we can make markets that work in a very new way. We can make markets in which, for example, organisations can be sure of the solvency of counterparties by computing that their assets exceed their liabilities without being able to discover what any of those assets or liabilities actually are. No need for meaningless “attestations” or after-the-horse-has-bolted audits: Financial markets that are built on the pillars of tokens, transparency and trust will indeed be the next generation.