Citigroup Inc. has carried out a simulation which shows how a private equity fund can be tokenized on a blockchain network, potentially paving the way for greater adoption of distributed ledger technology on Wall Street.
The bank worked with Wellington Management and WisdomTree to carry out its ‘proof of concept’, according to a Wednesday statement. The project showed it’s possible to issue and custody tokenized versions of private equity funds on behalf of clients in a controlled environment, while remaining compatible with existing bank systems, Citi said.
Simulations like this could make it easier for institutions to incorporate blockchain technology in a way that’s compliant with financial regulations, said Puneet Singhvi, managing director and head of digital assets for Citi, in an interview.
Banks like Citi and JPMorgan Chase & Co. have been exploring ways to update their existing infrastructure with blockchain technology for several years, enticed by the features it offers such as greater transparency and the ability to settle transactions instantly.
Citi will use the results of the simulation to evaluate whether it should offer services in this area, Singhvi said, with determinations to be made in the coming weeks. The test follows Citi’s September launch of a digital-asset service for institutional clients, which will transform customer deposits into tokens that can be sent anywhere in the world.
The latest projects by banks come amid renewed interest in the cryptocurrency market, as demand from recently approved exchange-traded funds sends the price of bitcoin to the highest level since December 2021.
Citi’s latest test tokenized and custodied a hypothetical Wellington-issued private equity fund, utilizing blockchain technology provided by smart contract platform Avalanche. Fund distribution rules were encoded into the underlying smart contract, Citi said, automatically dictating how tokens were split and transferred to simulated WisdomTree clients.
The project also explored the use of a private fund token as collateral in an automated lending contract with Depository Trust & Clearing Corp.’s digital assets unit, according to Singhvi.
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