Visa has created a new platform in an effort to help financial institutions issue fiat-backed tokens and test their use cases.
The payments giant’s guidance to banks exploring this space is part of a broader effort to create global standards that ease interactions between such entities, Visa executives noted.
As more real-world assets — from real estate to debt securities — end up on blockchains, there’s a growing need to bring more forms of cash onto those rails to trade them, Visa crypto head Cuy Sheffield said.
“We believe this creates a significant opportunity for banks to issue their own fiat-backed tokens on blockchains, do so in a regulated manner and enable their customers to access and participate in these activities. chain capital markets,” he told Blockworks.
Visa has seen firsthand how central banks are exploring the potential of tokenization and how it can modernize financial infrastructure, Sheffield noted.
For example, the company piloted with HSBC and Hang Seng Bank last year as part of the Hong Kong Monetary Authority’s Digital Hong Kong Dollar program. The test simulated interbank business-to-business payments, including property payments and settlements between collection agencies and merchants.
Also last year, the Central Bank of Brazil chose Visa to participate in a CBDC digital reality pilot.
Read more: ‘Learning by doing’ is critical to the development of the digital dollar, says Visa executive
“And then we started to see more interest from a lot of commercial banks and our existing partners who were tip-toeing around saying, ‘What are fiat-backed tokens and tokenized deposits?’” Sheffield told Blockworks earlier this year. “’Should we make one?’”
Spain-based Banco Bilbao Vizcaya Argentaria (BBVA) has been working in the new Visa Tokenized Asset Platform (VTAP) sandbox this year, Visa said on Wednesday.
The bank tested the issuance, transfer and redemption of a bank token on a testnet blockchain. It aims to launch an initial pilot with selected customers on the Ethereum blockchain in 2025.
“From our experience with banks, this is true [a slow process] for a reason,” Sheffield said. “You have to be careful and make sure you understand the technology and that you educate internal stakeholders as well as regulators.”
Fintechs, like PayPal, have taken innovative steps with stablecoins in recent years. Major asset managers have begun to embrace blockchain technology more meaningfully, with BlackRock launching its USD Institutional Digital Liquidity Fund in March.
Franklin Templeton, which launched its OnChain US Government Money Fund in 2021, began allowing institutional investors to transfer shares of the fund to other shareholders earlier this year.
Read more: A stablecoin with returns? Tokenized fund may be just the beginning for a fund giant
“We think the next phase is the arrival of the banks, who start to experiment and create their own products,” Sheffield told Blockworks. “I think this will open up a lot of opportunities if you can have more liquidity.”
What are the usage scenarios?
One of the lowest hanging fruits for banks is allowing real-time money movement between their own customers, Visa executives said.
For example, the JPM Coin System, an authorized payment trail and ledger for deposit accounts, makes this possible.
Read more: JPMorgan adds ‘holy grail’ payments feature as part of blockchain push
In markets where central banks are actively creating large-scale CBDCs, financial institutions are also interested in interbank transfers.
Catherine Gu, Visa’s head of CBDC and tokenized assets, told Blockworks that offering cross-border transfers to customers is an area of focus for banks.
“Especially for multinational companies that move money 24/7, the ability to do so is very limited right now,” she said. “So a lot of these big banks – when they look at the use cases of blockchain – are really coming from that perspective.”
Interacting with tokenized real-world assets could ultimately drive the most demand, Sheffield said.
Read more: How the latest TradFi blockchain trial could mark the ‘five-meter line’ for mass adoption
For example, a bank could let customers use a fiat-backed token to buy tokenized commodities or government bonds with instant settlement.
Using smart contracts to create structured finance products is another area that banks are exploring.
“You can have collateral that represents a commodity,” Sheffield explains. ‘And then you [will] can borrow in a tokenized version of fiat against that asset, and that can all happen automatically through a smart contract.”
Banks will likely use and create products on a range of public and private blockchains based on the use cases and regulatory environment in which they operate.
Read more: Goldman Sachs head of digital assets: The future is in public blockchains
Fragmentation remains a major hurdle to overcome, Gu said, noting that there is no one-size-fits-all approach to tokenization and smart contracts.
Visa could try to help create standards to ensure interoperability among financial institutions entering this segment.
“It would be nice to think about a unified platform, namely the blockchain, that would allow you to facilitate both cash flow and everything you’re trying to trade and transact,” Gu noted. “To really think about how tokenization can become mainstream, you have to think about a way to do that.”
