How a European Bank Offers its Tokenized Products?

 

“Sygnum is the world's first digital asset bank. We were the first financial institution to obtain a full banking license from the Swiss regulator FINMA, whose range of products and services is entirely dedicated to digital assets.” Thomas Eichenberger, Member of the Group Executive Board at Sygnum Bank. (“Tom Eichenberger - Senior Vice President - LinkedIn”)

In an interview with The Tokenizer newsletter, he also stated that digital asset services are made up of:

  1. Cryptocurrencies (digital currencies).

  2. Custody and trading services.

  3. Management of tokenized assets.

  4. Tokenization of assets.

  5. Regulatory and compliance services before financial authorities.

In this article, for educational purposes (it is not financial advice) we will explain each of the concepts expressed in the interview and at the end we offer a technological model for banking entities.

 

Digital currencies

There are two types of digital currencies according to the technology used in their issuance and operation:

  • Cryptocurrencies:

They have their own blockchain protocol being bitcoin the first and most recognized. They use encryption techniques to carry out transactions and store data, the most recognized Bitcoin, Ethereum, Cardano, Ripple.

  • ERC20 tokens:

An ERC-20 token, is a Smart contract deployed on the Ethereum blockchain (and other compatible ones), which has a preset data structure that allows for a variety of mathematical functions such as the Mint function and the Send function:

Mint function: Creates a total supply of coins in the account or address of the owner of the contract.

Send function: Send or transfer a certain number of tokens to other accounts or addresses.

The most used USD Tether, USD Coin, Uniswap, DAI, USD Binance, ChainLink. 

 

Custody and trading services.

A.- Custody services:

In a Coindesk.com article, he describes the process that secures assets against theft. Custodians are entities to oversee your cryptocurrencies for you:

  • Technically they don't store any of the assets because all the data and transactions are on a public ledger called the blockchain protocol.

  • Instead, custodians protect users' private keys; that is, the most important part of a cryptocurrency wallet, which allows access to the funds that are stored in your accounts.

  • The digital assets that are in custody in 2022 is US$223,000 million.

A1.-Types of cryptocurrency custodians:

  • Centralized Exchanges (CEX):

Among them Binance, Coinbase, Kraken, KuCoin, Bitfinex, Gemini, Coincheck, Bitstamp, Bybit.

  • Digital asset managers: Banks regulated and licensed to offer the custody service. Notable native cryptocurrency custodians include Anchorage, NYDIG, and Paxos.

  • Custody banks: The Office of the Comptroller of the Currency of the USA authorized that all banks at the national level could provide the cryptocurrency custody service. Among them BNY Mellon, Citibank and Fidelity.

B.-Digital asset trading service:

It is a meeting point where cryptocurrencies, tokens and NFTs are bought, sold and exchanged.

  • Centralized Exchanges (CEX): They are platforms that belong to a company or organization with traditional administration. These are highly regulated platforms that comply with the rules called KYC (Know Your Customer) and AML (Anti-Money Laundering) and in which users must identify themselves in order to participate. Example Binance, Coinbase, Kraken.

  • Decentralized exchanges (DEX): They are platforms managed by an autonomous community called DAO, here the sale is person to person. They do not have the regulations like the CEX. Examples Uniswap, PancakeSwap, Kyber. 

 

Management of tokenized assets.

Kryptonsolid.com, in a didactic way, tells us that the management of cryptographic assets:

  • It is the practice of buying and selling digital assets for use as an investment.

  • The portfolio made up of all digital assets is expected to experience a general increase in value.

  • Managing a portfolio of cryptocurrencies, or part of a portfolio, has become a necessity, as cryptocurrencies and other blockchain-related digital assets have attracted the attention of investors with financial knowledge, but not blockchain technology.

  • Investors are looking to add crypto assets such as Bitcoin, NFT and other digital offerings to diversify to capture potential benefits from this new asset class. 

 

Asset tokenization.

Tokenization transforms any asset in the real world, tangible or intangible, into a digital good. Let us illustrate this process with an example:

The automotive company BMW wants to tokenize the issuance of one hundred million shares, each with an IPO value of $80.

Step 1.- 100 million “BMWshares” tokens will be issued, one token corresponds to one share, each token will have an output value of 80 USD.

Step 2.- A Smart Contract ERC20 is written in Solidity language, the constructor function with the symbol, name and total supply, which is credited to the issuer's account (here I use the Binance Smart Chain test network compatible with Ethereum) . Issuer account:

0x30D752489CF27652fcc2553AAaaB2D5DD9359C80

Note: In practice, ERC20 contracts that offer high security are more complex, it involves deploying a family of more than 100 Smart Contracts (SC) for each project, each one with mathematical functions to execute a specific action such as: control access to funds, transfer SC ownership, pause trading, send or transfer certain amount of tokens to other accounts, burn or remove tokens.

Step 3: Al ejecutar los SC, se identifican por una cuenta o dirección: 0x7764afFf48903d437d5581878aCdd0BBC518641C

Step 4: We can verify our contract in the Binance blockchain explorer:

  • With the address of the owner or issuer (red arrow).

0x30D752489CF27652fcc2553AAaaB2D5DD9359C80

  • We accredited the one hundred million BMWshares tokens (yellow arrow).

Step 5: Finally, we register the Smart Contract in the Metamask crypto wallet (see first image), this allows us to have the 100 million tokens:

  • We write the address of the SC in the Metamask wallet (red arrow).

  • The name of the shares BMWshares.

In the second image, the tokens are ready to be sent to the buyers of the tokenized shares (see green arrow).

 

Regulatory and compliance services before financial authorities.

To implement a digital asset platform as a regulated financial institution, it is necessary to pass the KYC and AML drivers. In addition, share information with the tax authorities of different countries:

  • KYC obeys the acronym of Know Your Customer, that is, know your client. It implies knowledge of the identity of users, their financial activities, and the risks they may represent.

  • Anti-Money Laundering AML practices focus on carrying out procedures that deter and prevent potential offenders from committing fraud or crimes related to money laundering. In this way, criminals cannot disguise the illegal origin of the money in any type of transaction.

  • KYT knows your transaction; it allows you to identify blockchain transactions involving addresses or cryptocurrency accounts associated with illegal activities. 

 

Technological model for banking entities.

Finally, we present a technological model, which the Fiwork team has developed, which allows the application of any banking entity to access highly qualified digital and cryptographic service providers.

The Fiwork Middleware is software that facilitates the exchange of information between applications that make up the blockchain module. In general, the middleware manages the tasks of data management, application services, messaging, authentication, and API management.

 
Carlos Sampson