(Bloomberg) -- As Wall Street pulls ahead of crypto-native players in the field of tokenizing real-world assets, mainstream institutions face the question of whether to push on into the gray area of decentralized finance.

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This gray zone, also known as DeFi for short, comprises projects that use automated software atop blockchains to deliver various financial services. Such ecosystems are typically outside the control of any one party, shrouded in regulatory ambiguity and open to a potentially wide pool of participants.

At issue is whether Wall Street’s digital-asset pioneers should intersect with these riskier crypto environments. The alternative approach for big institutions is to build blockchain-based representations of assets like bonds on gated digital ledgers, or carefully steer the use of tokenized products on public ones.

For some banks, full scale decentralization in tokenization “is not going to be realistic or desirable,” said Steven Hu, head of digital assets, trade and working capital at Standard Chartered Plc. “There’s a critical need for centralized authority to ensure to the authenticity, the uniqueness and the proper use of the underlying asset.”

Standard Chartered expects a tokenization market of about $30 trillion by 2034, with trade finance contributing a 16% share. At present, the market value of cryptocurrencies stands at $2.4 trillion. So far, about $13.2 billion of real world assets are tokenized. Private credit is the largest segment, accounting for $8.4 billion, ahead of US Treasuries in second, according to rwa.xyz.

BlackRock, Franklin

At the vanguard in the Treasuries segment are BlackRock Inc. and Franklin Templeton, which operate government securities funds whose ownership is recorded on blockchains. The funds have garnered nearly $1 billion in assets — represented by the BUIDL and BENJI tokens — since launching in March 2024 and April 2021, respectively. That’s more than half of the total $1.8 billion in tokenized Treasuries, rwa.xyz data show.

Crypto-native players see restricted, private blockchains as unlikely to scale. Larger ecosystems will develop on public blockchains, said Nana Murugesan, president at Matter Labs Inc., a company that seeks to improve the usability of Ethereum, the most important commercial highway in digital assets.

Franklin Templeton ultimately expects its BENJI tokens, which represent shares of its OnChain U.S. Government Money Fund, to be tradeable across the broader digital-asset ecosystem. Currently, investors must buy or sell the token via the asset manager’s platform.

“We fully expect that there’s a future space where BENJI holders will be able to potentially transfer amongst each other,” said Roger Bayston, head of digital assets at Franklin Templeton.

Working With Regulators

Franklin Templeton’s fund had collected about $402 million in assets as of June 30. The company is currently working with regulators to figure out how a stablecoin could be used in a decentralized environment — on the proviso that participating wallets have gone through know-your-customer and anti-money laundering checks, Bayston said.

“I think we’re still working with regulators about how that process works,” he said.

BlackRock’s USD Institutional Digital Liquidity Fund, which invests in cash, US Treasury bills and repurchase agreements, has drawn in about $527 million since launching in March, according to Etherscan data.

Its availability on Ethereum, a public blockchain, and an instant redemption mechanism have helped boost inflows, according to Carlos Domingo, co-founder and chief executive officer of Securitize Markets, a BlackRock-backed tokenization platform.

DeFi protocols Ondo Finance and Mountain Protocol have used BUIDL, the BlackRock fund’s token, to build their own offerings.

“DeFi is the horse that pulls the tokenized RWA cart,” said Jeremy Ng, co-founder of OpenEden, which tokenizes short-duration US Treasuries. “Without this burgeoning on-chain economy, there would be no demand for tokenizing these traditional asset classes in the first place.”

A Place for DeFi?

Permission-based or not, banks, asset managers, crypto players and even regulators are exploring the potential benefits of tokenization. The Monetary Authority of Singapore-led Project Guardian has brought together 24 financial institutions to test asset tokenization use cases, with JPMorgan Chase & Co., Deutsche Bank AG, Citigroup Inc. and Ant Group Ltd. all participating.

While MAS is “cautious about cryptoassets that have no underlying backing,” the regulator sees “a sound use case to tokenize financial assets” and will work with the industry to grow such assets, Chia Der Jiun, managing director of MAS, said at a briefing.

Goldman Sachs Group Inc. struck out alone to develop a digital-asset platform called GS DAP, built on a private blockchain, which was used by the European Investment Bank and the Hong Kong Monetary Authority for bond issuance.

Whether such tokenization projects end up encompassing DeFi remains an open question. Franklin Templeton’s Bayston said it will happen in time, as greater adoption from regulators and others brings understanding “of what public blockchains can do for the overall efficiencies of the capital markets.”

--With assistance from Chanyaporn Chanjaroen and Bernadette Toh.

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