State Street Digital puts faith in CBDCs
Nadine Chakar, head of State Street’s blockchain division, says CBDCs will make tokenization a reality.
Nadine Chakar, the newly appointed head of State Street Digital, says the bank expects tokenizing assets based on blockchain will take off once governments introduce digital versions of their currencies.
State Street, a global custodian with over $40 trillion of client assets, has recently announced the creation of State Street Digital as a third division, alongside State Street Trust Bank (for asset services) and State Street Global Advisors (for asset management).
Boston-based Chakar has served most recently as head of State Street Global Markets, the trust bank’s trading and execution arm, but will now be running State Street Digital full time. Its remit focuses on blockchain-based finance, especially tokenization of assets and the use of smart contracts.
The bank can’t trade cryptocurrencies. Like its competitors also angling for a blockchain entry – including BNY Mellon, BNP Paribas, and Nothern Trust – it is waiting for US regulators such as the Federal Reserve Bank and the Securities Exchange Commission for clarity regarding crypto.
“This division focuses on wallet management, cross-border payments, and electronic cash in the form of CBDCs and stablecoins,” Chakar told DigFin. It will also pursue research and infrastructure around tokenization. “We’ll dip a toe into DeFi too,” she said, “but there’s no first-mover advantage there.”
She expects the most activity to accrue around tokenization. “The use cases are out there, and CBDCs will expedite them.” For example, asset owners will turn to tokenization to create new forms of collateral, as well as use smart contracts and blockchain rails to realize efficiencies such as near-instant settlement of trades.
These are the services Chakar wants State Street to intermediate. “Tokenization is more interesting than just digital custody, which will get commoditized,” she said. “We want to develop our own DeFi apps and revolutionize asset services.”
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Although she says she is cautious regarding private stablecoins such as Tether and USDC, State Street Digital is in contact with their management, to see how it can support their need to hold U.S. dollars and cash equivalents. “But we’re not transacting with them,” she said, and State Street won’t hold those coins as they trigger a punishing requirement of capital reserves.
Instead the bank is looking to develop its own capabilities to facilitate tokenization, across the entire lifecycle: pre-trade, trade, and post-trade. This mirrors what State Street does in classic finance. On the pre-trade side it offers fund administration and accounting, manages registrars, and offers performance analytics. Its markets division provides best execution, a function Chakar says she wants to introduce to the blockchain world – but State Street will begin with custody.
The minute the first investment is approved, the floodgates will openNadine Chakar, State Street Digital
Does this imply the bank will look to set up its own exchange, as DBS has done? “Maybe,” Chakar said. For now, the bank is positioning its foreign-exchange trading platform, Currenex, to handle crypto, with one London-based crypto startup, Pure Digital, already saying it will use the platform.
“We’re white-labeling that technology now,” Chakar said. “We operate within regulatory confines, but we could use Currenex to create new liquidity pools.”
Where blockchain can scale
Chakar suggests the business might first take off in Europe. She says Germany’s BaFin is supportive of tokenization, noting it already allows fund managers to hold up to 20 percent of the portfolio in crypto. And France is doing pioneering work in CBDCs.
The bank has so far lined up mandates to help Germany’s Iconic launch a bitcoin ETF, along with similar mandates from Van Eck and Wisdom Tree in the U.S.
“The key to tokenization is scale,” she said. This is why she suggests Asian jurisdictions such as Hong Kong and Singapore may not lead the new industry, despite already having regimes that allow for securities tokens. “They have a sophistication but nothing at scale,” she said, citing the bank’s preference to get involved in cross-border activities rather than domestic-only regimes.
DigFin asked about China’s digital renminbi, which certainly has scale and is ahead of any European initiative, but she didn’t have a comment – perhaps reflecting its relatively closed market for global investors. She did say that CBDC developments would have to provide use cases for institutional investors, as opposed to targeting retail activity.
“The U.S. is still the largest market, but we’re waiting for the right opportunity,” she said. Although some regulators have been pro-crypto, such as the Office of the Comptroller of the Currency and the Commodities and Futures Trading Commission, State Street is still waiting for the Fed and the SEC to provide more guidance.
She notes the Fed and the European Central Bank have promised to address blockchain finance by the end of Q3, while the new head of the SEC, Gary Gensler, is familiar with blockchain technology. Chakar expects these institutions to bring more clarity to institutions’ use of blockchain finance.
“Then the clock starts ticking to mass adoption,” Chakar said. “But our clients aren’t waiting. The minute the first investment is approved, the floodgates will open.”