Citi Tests Benefits of Private Markets Tokenization With Avalanche Evergreen Subnet ‘Spruce’

Avalanche

In a recent report, Citi outlines how it leveraged the Avalanche network to test how the combination of blockchain infrastructure, tokenization, and smart contract logic might help to re-architect capital markets and enhance financial services. The bank tested use cases on Avalanche “Spruce,” an Evergreen testnet Subnet designed for buy- and sell-side institutions to benefit from public blockchain infrastructure and innovation in a permissioned manner. Together with key investment and wealth management clients like Wellington Management, WisdomTree, and ABN AMRO, the firms tested a variety of use cases with a focus on private markets. Citi’s tests focused on private assets given the collective $10T AUM markets remain riddled with manual operations, lack of transparency, and limited standardization.

Included in the series of tests were a variety of traditional and blockchain-native institutions:

The use cases tested included:

End-to-end token transfer: ABN AMRO’s wealth management arm instructed Citi to tokenize and transfer the Wellington-issued private equity fund to a WisdomTree client wallet on Avalanche Spruce while leveraging encoded compliance checks and identity credentials issued by WisdomTree and Tokeny.

Secondary transfer to enable trading: Enabled bilateral tokenized fund transfer on Spruce between WisdomTree clients also leveraging encoded compliance checks and identity credentials.

Validating new capabilities with collateralized lending: Using DTCC Digital Assets’ Composer, lending and collateral smart contracts were deployed on Spruce to process an end to end securities lending transaction where an investor pledged tokenized private equity funds to borrow WisdomTree Money Market fund tokens.

To carry out the tests, the Avalanche Spruce network was selected for its multi-level permissioning, EVM compatibility, custom (i.e., non-crypto) gas fees, institutional focus, and further customizability. Avalanche Spruce launched in spring 2023, offering financial services firms a way to experiment with tokenization and the merits of on-chain finance in a controlled sandbox-type environment. The initial cohort consisted of Wellington Management, WisdomTree, T. Rowe Price Associates, and Cumberland. Spruce is one of the many Avalanche Subnets that already supports a host of enterprise and institutional partners, with many more on the horizon.

In the report, Citi ultimately concludes that tokenization “unlocks the value in traditional markets to new use-cases and digital distribution channels while enabling greater automation, data, and operating models, such as those facilitated by digital identity and smart contracts.” The report identifies further takeaways, including:

On-chain data. Creating the rails for two-way investor and issuer data flow in a secure and compliant manner is key, especially when this data lives in multiple traditional and disparate systems. Once on chain, this data can be wrapped with the token and leveraged for novel use cases.

Transaction-level privacy. Financial transactions usually contain confidential or proprietary information, and new technologies are being developed to enable transaction-level privacy (e.g., ZK, FHE, etc.).

Consistent token standards. While the ERC-20 standard is powerful and most used for issuances, it is not directly fit-for-purpose for representing securities, which come with associated conditions to ensure investor protection and a fair and orderly market. Multiple frameworks and standards potentially more fit for financial assets are being developed, but it’s important to ensure a basic-level of compatibility with ERC-20 and EVM given their widespread adoption.

Asset-servicing rails. This includes the ability to support complex features like capital calls, interest payments, and other types of fund disbursements as processes are bridged from legacy to on-chain infrastructure.

In summary, Citi’s PoC found that tokenizing traditional assets in a compliant, efficient environment “has the potential to transform the way private market assets are held and transacted today.” Avalanche Evergreen aims to provide such a compliant environment.

“The Avalanche Spruce Subnet has enabled us to simulate transactions utilizing smart contracts, validate identity credentials for individual investors, and showcase the power of this technology with peer-to-peer transfers in a controlled environment on a blockchain network,” said Maredith Hannon Sapp, Head of Business Development, Digital Assets at WisdomTree. “We are excited to continue to partner with thought leaders like Citi, Wellington, and DTCC Digital Assets on advancing blockchain enabled finance.”

“The Avalanche Spruce test network has proven to be an ample technical sandbox environment for exploring the potential of blockchain technology within our industry,” said Mark Garabedian, Director-Digital Assets & Tokenization Strategy, Wellington Management. “We look forward to collaborating with Citi, strong, long-term partners who are providing meaningful developments and thought leadership in the blockchain space.”

Visit Avalanche Evergreen to learn more about what institutions and other companies can accomplish on-chain with Avalanche. Fill out a contact form to get started today.

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