February 2024

BRINGING TRADITIONALASSETS TO DIGITAL NETWORKS
A SUMMARY OF DTCC’S PARTICIPATION IN CITI’S PROOF
OF CONCEPT ON TOKENIZATION OF PRIVATE ASSETSTOKENIZATION OF PRIVATE ASSETSDRIVING BLOCKCHAIN INTEROPERABILITY, LIQUIDITY, AND EFFICIENCY IN
SECURITIES LENDING AND COLLATERAL MANAGEMENT
The financial industry is undergoing rapid transformation,
spurred by the shift towards digitalization, with market
participants increasingly looking for ways to raiseliquidity, reduce cost and risk, and automate inefficient
processes. At DTCC, we believe digital asset technology
offers exciting potential to capture these benefits andcould ultimately help push us toward a more streamlined
and resilient financial ecosystem – where blockchain
networks and traditional rails seamlessly integrate. We
are committed to supporting the industry shift fromblockchain experiments to production-ready capabilities.
Successful adoption of distributed ledger technologies(DLT) hinges on two key hurdles: the portability ofassets and the need for consistency of processes
across both public and private ledgers. Solving forthese challenges will not only boost liquidity for digitalassets, but it could also further unlock the automation ofend-to-end processes including distribution, lending,pricing, and collateral management.
With these challenges in mind, DTCC Digital Assets(formerly Securrency) was pleased to partner with
Citi, Wellington Management and WisdomTree in an
innovative Proof of Concept (POC) to replicate andimprove the on-chain and off-chain processes of anasset lifecycle with the use of Web 3 technologies.
Our shared thesis: tokenization, smart contracts,
blockchain interoperability and compliant asset
portability across different ledgers offer an innovative
solution to increase liquidity to digital financial assets
as it reduces the operational barriers investors faceto enter or exit their positions at any given time.

“

We are pleased to have participatedin this innovative POC to enhancethe economic value of digital funds
beyond issuance, showcasing theportability of compliance rule sets
across ecosystems and back-officeprocesses. Our technology andefforts demonstrated blockchaininteroperability of assets acrosssmart contracts and blockchain
standards, and potential
efficiencies with lending andcollateral management processes.
By addressing current industry
challenges in the institutional
space, we have begun to open thedoor for widespread adoption ofdigital assets.

In this POC, DTCC Digital Assets participated in “Use
Case 3” focused on lending and collateral management.
Conducted on the Avalanche Spruce institutional test
subnet, a Wellington issued private fund tokenized by Citi
was used as collateral and a WisdomTree Money Market
fund token was used as a borrowed asset. DTCC Digital
Asset’s Composer, a platform that enables the creation and composabilityof smart contracts, was used to automate the core workflow of the lendingtransaction including loan processing, collateral pledging, and liquidation.
We proved that assets issued using various tokenization platforms can beported across networks and ecosystems, with their compliance rules remaining
intact and with ability to move across wallets and investors atomically.

”

NADINE CHAKARManaging Director,
Global Head of DTCC
Digital Assets

WE BELIEVE THIS CREATES SEVERAL OPPORTUNITIES TO IMPROVEEFFICIENCY AND REDUCE RISK IN SECURITIES LENDING AND
COLLATERAL MANAGEMENT PROCESSES, INCLUDING:

1Tokenized assets combined with smart contracts can expand the usability of
the asset in different types of transactions, e.g., Private Equity funds can bepledged to borrow Money Market Funds, as we did in the POC.

2

Loan liquidation rules built into the smart contract can facilitate atomic settlement, eliminating
the need to manually transfer collateral between parties, reducing counterparty risk.

3

The smart contract can establish a single source of truth with respect to eligibility and availability ofcollateral throughout the lifecycle of a securities loan, enforcing the terms for provisioning collateral.

Tokenization and smart contract technology offers a reliable and scalable way
to re-shape and strengthen financial markets infrastructure.
This lending and collateral management use case is just one example of how DTCC is empowering
the industry with blockchain interoperable and compliant tools to further advance the adoptionof digital assets and drive liquidity. Moving forward, there is a need for further experimentationand exploration to define new roles and ecosystem dynamics to propel broader adoption andaccess. This is just the beginning. We encourage you to read the report to learn more.

ABOUT DTCC
DTCC is the premier post-trade market infrastructure for the global
financial services industry. From 20 locations around the world, DTCC,
through its subsidiaries, automates, centralizes, and standardizes
financial transaction processing, mitigating risk, increasing transparency,
enhancing performance and driving efficiency for broker/dealers,custodian banks and asset managers. Visit www.dtcc.com for more.

ABOUT DTCC DIGITAL ASSETSDTCC Digital Assets provides institutional-grade infrastructure and products
to facilitate end-to-end lifecycle processing for digital assets. Its innovative
digital infrastructure enables market participants to unlock the power of
institutional DeFi by accessing secure, efficient, and compliant capital
markets. DTCC Digital Assets’ blockchain agnostic solutions allow for nearreal-time payments and blockchain interoperability and are designed toincrease global liquidity. In addition, its technology will ultimately underpin
the development of DTCC’s enterprise digital asset infrastructure.

Bringing Traditional Assets to Digital Networks: Exploring the Tokenization of Private Markets

Background
Across financial services, there is a growing recognition thatthe use of distributed ledger technology (“DLT”) presents
a significant opportunity to re-architect capital markets.
Against an increasingly complex and competitive environment
with persistent margin pressures, backed by a history oftechnological innovation spurring developments like ETFs
or direct indexing, financial institutions are now exploring
opportunities provided by DLT.
The potential benefits range from solving infrastructuralissues in traditional operating models to the possibility of
new investment product and servicing capabilities enabledby DLT features, such as programmability and composability.
This could represent a step-change in how private assets areheld and transacted.
The vision is an end-state of digitally native investment
products that are created, traded, and administered entirely
on DLT infrastructure. Digitally native products have thepotential to enable better distribution, unlock new productcapabilities, and deliver operational efficiencies. The
transactions are also fully traceable and auditable with thepotential to exist on a shared infrastructure resulting in
reduced reconciliation overhead.

In such an end-state, regardless of whether asset allocation andpersonalization are driven by emerging technologies like artificial
intelligence (AI) or by an advisor, DLT can be the complementary
execution layer that a range of assets - including efficientpublic market assets like ETFs and equities - live and transact
on. Leveraging the power of smart contracts with ownership
recorded on DLT, these assets can be automatically allocated,fractionalized, and rebalanced by intelligent applications
supported with instant implementation. The future of wealthmanagement for the average self-directed investor would likely
see AI-assisted personalized model portfolio allocation with
DLT-based implementation.
However, the transition from traditional to digital infrastructure
is complex. Tokenizing existing assets, issuing new assets on
DLT networks, and changing the underlying administration
technology bring operational challenges and associated costs.
In addition, even if every new asset were now to be issued
digitally, there would still be a long tail of analog assets likely
left out of the new infrastructure as they currently live on the
traditional infrastructure.
Hence, market participants must evaluate how to enable
an efficient and flexible on-ramp for traditional assets todigital networks. Such an on-ramp mechanism, operating
at scale and facilitating interoperability between different
components, coupled with an effective overall compliance andcontrol environment, could accelerate the digital transition forinvestors, issuers, and other market participants.

The potential benefits range from solving
infrastructural issues in traditional operating models
to the possibility of new investment product andservicing capabilities enabled by DLT features,such as programmability and composability.

2

Bringing Traditional Assets to Digital Networks: Exploring the Tokenization of Private Markets

Chart 1: Spectrum of Benefits to Improve Pain Points in Traditional Operating Models

Value Proposition of Tokenized Funds
Streamlined
Workflows

Access to New
Customer Segments

New Capabilities
Currently not Possible

Smart contract-driven processes
enable automatic settlement,
lifecycle management, andcompliance checks.

Potentially reduce high minimum
investment thresholds whichkeep alternatives out of reach formany accredited investors.

This translates into reduced
counterparty risk, increased
speed, and cost savings,
particularly in fixed-income andprivate market assets.

Tokenization could enable
access to a more digitally-savvy
customer base comfortable withwallets and tokens.

Compliance features, such as
accreditation checks, minimum
holding periods, and jurisdictional
restrictions, can be programmed
into tokens.

Risk reduction
and cost efficiencies

Increased
accessibility

Citi Proof of Concept
on a Permissioned
Institutional Test Subnet
In partnership with key investment and wealth management
clients, we conducted a proof-of-concept (“PoC”) to better
understand key technological, operational, and legal considerations
that are required to kickstart the transition from analog to digital.
The PoC consisted of the issuance and transfer of a dummy “testtoken” with no value and which did not represent any legal rights,
permitting us and our clients to focus on technological andoperational issues.
Our evaluation focused on private funds due to the potentialdelta of efficiency and accessibility which digitization andtokenization can provide for these assets versus the current
fragmented and unstructured operating ecosystem. Private
markets, although an over $10 trillion asset class1, arecharacterized by an infrastructure that is complex and manual,with this lack of standardization and transparency leading toinefficient distribution and operations.
1

Tokenized funds allow for
automatic portfolio allocation,straight-through processing, andautomated capital calls.

Solving for distribution
and fractured liquidity

Overview
Citi, along with Wellington Management and WisdomTree,
tested use cases that demonstrated how traditional assets
could be tokenized and brought onto digital networks.
In the PoC, we simulated workflows using a Wellington
Management-issued private equity fund as the underlying asset.
ABN AMRO acted as the investor into the underlying fund, andWisdomTree simulated the role of the wealth platform on the DLT
network. Citi played the role of the issuer’s agent. We used theAvalanche Evergreen Subnet called “Spruce” for its multi-level
permissioning, EVM compatibility, institutional focus,
and customizability.
Once on the Spruce test network, these tokenized assets could
be programmed to automate operations, settle faster, andenable new and composable use cases. In the PoC, the tokens
were always under the control of Citi, leveraging smart contracts
enforcing “compliance-by-design”, even as we relied on KYC
credentials issued by WisdomTree, simulating their role as thewealth platform. Recording ownership on DLT also enables use
cases that were previously infeasible, such as using a private asset
fund token as collateral to borrow more liquid asset tokens, tested
jointly with DTCC Digital Assets (formerly Securrency).

Citi Business Advisory Services’ analysis based on data from Broadridge Global Market Intelligence (GMI)3

Bringing Traditional Assets to Digital Networks: Exploring the Tokenization of Private Markets

Table 2: Participant Roles
EntityRole

Citi

Issuer of enhanced ERC-20 compliant tokens from a Citi-deployed smart contract

ABN AMRO

Wealth management entity instructing Citi to transfer a traditional fund holding under Citi custody toa wallet on a digital network

Wellington Management

Asset manager simulating the role of the issuer

WisdomTree

Asset manager and wealth platform issuing identity credentials, undertaking KYC verification,
onboarding end-investors, and testing receipt of test tokens and a use case related to lending
and borrowing

Ava Labs

Infrastructure provider for private permissioned blockchain test network

DTCC Digital Assets

Digital assets technology infrastructure provider that developed and deployed lending and collateralmanagement smart contracts

TokenyTokenization technology provider that supported the test of ERC-3643 and ONCHAINID framework

Chart 3: Setup of Participants on the Permissioned Institutional Test Subnet

Hypothetical
Wealth Clientof ABN AMROID Credential
Issuance

Fund
IssuerHypothetical
Investor of
WisdomTree
IssuerWalletInvestor
WalletCiti
Smart
Contract
Lending
Smart
Contracts*

Investor
WalletSetup Flow
Sub Network

4

Avalanche Spruce
Permissioned Institutional Test Subnet* based on ERC 4626 tokenized vault standard

Bringing Traditional Assets to Digital Networks: Exploring the Tokenization of Private Markets

Use Cases Tested
1. Tokenize a simulated traditional private fund and bring it onto a DLT network with underlying fund distribution rules encoded
into the smart contract and embedded in the token.
2. Test multiple scenarios of transfers with the Citi smart contract relying on identity credentials issued by WisdomTree. We tested
multiple implementation models, ranging from simple ID NFTs to the ERC3643-ONCHAINID framework.
3. Jointly with DTCC Digital Assets, the PoC evaluated using the private fund token as collateral in an automated lending contract
for borrowing more liquid money market fund (MMF) tokens from a pre-funded lending pool. The loan was subject to a haircut
and collateralization ratio set based on the pool parameters.
Chart 4: PoC Simulated Citi User Interface for Tokenized Funds Showing Issuance and Management of Fund Tokens on
Multiple Networks

5Bringing Traditional Assets to Digital Networks: Exploring the Tokenization of Private Markets

Key Takeaways• While industry views point to digitally native issuance –administration – transfer workflow as the targeted end
state, tokenization of existing assets can offer meaningfulimprovements over the status quo and is likely a necessary
step for achieving scale. Tokenization unlocks the value
in traditional markets to new use cases and digital
distribution channels while enabling greater automation,
more standardized data rails, and even improved overall
operating models, such as those facilitated by digital
identity and smart contracts. These are significant
advantages over traditional models.
• Encoding asset distribution rules into smart contracts canhelp enable always-on compliance, including through afully traceable audit trail. This could provide some levelof assurance that the transfer of the asset is consistent
with legal and regulatory requirements. For instance,
using the ONCHAINID framework, we tested automating
conditions around minimum holding-period, investorjurisdiction verification, investor qualification checks, etc.
In combination with fractionalization, more transparency,
and liquidity for secondary trading, this capability could
open-up hitherto inaccessible asset classes like private
assets to a wider base of investors.
• Beyond an initial distribution use case and digital tokens
providing an easier format to handle and transact, our
expectation is that tokenization will soon start driving
tangible utility through the new use cases it enables. The
programmability provided by digital tokens enables models
that are traditionally infeasible, for instance, automating
rules-based asset allocation. Making it easier for private
assets to trade and settle faster might also make them moreaccessible in automated model portfolios.
• In working with law firms Allen & Overy LLP and Davis Polk
& Wardwell LLP, we have identified a number of potentialconsiderations that need to be assessed to establish alegally sound tokenization framework, which include but
are not limited to the following issues 1) legal entity andpermissibility, 2) legal and regulatory status of the tokens,3) contractual rights, 4) AML/CFT, and 5) capital and tax.
This analysis should include the optimal go-to-market
jurisdiction, especially in light of continued regulatory
fragmentation across leading financial centers.
• Identity standards have matured and smart contracttechnology has the potential to leverage such standards tobring major gains for a variety of asset classes, with private
markets demonstrating the most significant uplift. The
adoption and implementation of these identity standards
on the investor side may be crucial to these networks

6

gaining critical mass. It is important for the industry tocome together to build an infrastructure around identity,
as a public utility of sorts, for tokenization to gain morewidespread adoption.
• The data required for digital networks to support theseassets in a tokenized format is not to be ignored. Creating
the rails for two-way investor and issuer data flow in a secureand compliant manner may be key for many promising use
cases, especially when data lives in multiple traditional
systems. Once brought on-chain, this data can be wrapped
along with the token and leveraged for novel use cases.
• Digital networks are transparent by design. However,financial transactions usually contain confidential or
proprietary information. Even though transactions on digital
networks only capture wallet addresses and associatedpublic keys, potential repeated use of keys could enable
observers to identify transaction patterns, and thereby
compromise the identity of the real-world entity or
individual. There is however meaningful progress in thedevelopment of new technologies to introduce transactionlevel privacy through verification without knowledge (zeroknowledge proofs), fully homomorphic encryption, etc.
• Token standards are important to set a consistentframework for issuers, investors, KYC/AML providers,wallets, exchanges, regulators, and developers to work
together without friction. Whilst the core EVM-based
ERC-20 standard is powerful and most-used for issuances,it might 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 and securities are being developed. However, it isimportant to ensure a basic level of compatibility with ERC20 and EVM frameworks given their widespread adoption.
• Asset-servicing rails, including the ability to support complex
private equity features like capital calls, are going to be as
critical as enabling the initial issuance. In the initial periodof tokenization, it is very likely that different forms of theasset would have different settlement timelines (potentiallyinstant on DLT vs weeks and months on traditional rails), andthese differences would need to be bridged.
• Leveraging smart contracts for use cases like lending
and collateral management will help unlock the power ofcomposability whereby assets tokenized by one institution
can be used as collateral by other institutions. In the
PoC, DTCC Digital Assets’ Composer technology wasused to automate core lending workflows including loan
processing, collateral management, and liquidation. This
was a promising use of self-executing processes that could
potentially help unlock operational efficiency and scalability.

Bringing Traditional Assets to Digital Networks: Exploring the Tokenization of Private Markets

Conclusion and
Next Steps

Contributors:

This PoC demonstrates some of the benefits oftokenization in private markets. Through traditional
partnerships (issuer, distributor, servicer) and leveraging
DLT (moving value over the internet, digital identity,
fractionalization, smart contract-based compliancechecks), we propose a framework aimed at putting private
assets into the hands of investors in newer digital-formats
with upgraded capabilities, not possible under the
traditional market structure.

1. Citi

There are often complex legal and regulatory restrictions
related to private assets. DLT-based systems can beused to aid banks and other financial institutions insatisfying these legal and regulatory requirements. This
would enable greater automation and the potential for anenhanced compliance and control environment for issuers,
distributors, and investors.

6. Tokeny

2. Wellington Management
3. WisdomTree
4. DTCC Digital Assets
5. Ava Labs

Much work remains to be done. Our PoC highlighted a few
priority areas including the evaluation of 1) end-to-end data
rails, 2) end-to end servicing workflow, 3) nuanced digital
identity solutions, 4) incorporating a tokenized cash leg tofacilitate atomic settlement, and 5) comprehensive legal
and regulatory considerations to validate a suitable model
to bridge analog and digital networks.
Overall though, our evaluation showed that providing aflexible on-ramp for traditional assets to digital networks
for distribution and enabling a compliant and efficientenvironment for management and servicing of theseassets has the potential to transform the way private
market assets are held and transacted today.
Citi clients can request the detailed report or discuss private
market tokenization with us at nisha.surendran@citi.com
or ioana.niculcea@citi.com.

7

Disclaimer“Digital Assets” is a broad term and can cover different products including, without limitation, tokenized securities
and assets, tokenized deposits, stablecoins, cryptocurrencies, e-money tokens, utility tokens, Non-Fungible
Tokens, and other digital representations of value or contractual rights that may or may not be based on distributed
ledger technology systems (e.g., digital yuan or e-money). Certain types of digital assets may not be issued or backed
by a central bank or other authority or issuing entity, may not be backed by fiat currency or other assets, and may besubject to different regulatory treatment or may be unregulated in one or more jurisdictions.
The laws and regulations surrounding Digital Assets, the technology supporting them, and related documentation,
including contractual documentation, are evolving. Citi assumes no obligation to update You or the Document toreflect any ongoing developments in these areas.
Citi does not assume any undertaking to:• supplement such information as further information becomes available or in light of changing circumstances,
laws or regulations or to correct any inaccuracies which may become apparent,• to update You of such developments or of their impact on Your financial position when trading in such Products.
Any Citi initiative discussed or mentioned in the Document may be subject to regulatory and/or internal approval andCiti may make further changes or withdraw such initiative or related information without prior notice and without
having any liability for losses incurred due to Your reliance on such information or initiative.
From time to time and as a result of the evolving landscape characterising digital assets, Citi may be required tochange the terms under which You enter into Transactions or Citi’s internal categorisation of a type of digital asset or
Product, including in order to comply with legal requirements or to reflect changes in the underlying technology or in
the cost of running its business and Citi has no liability for any losses incurred due to such changes.
You will need to ensure that You obtain legal, financial, tax advice from independent and professional advisors whichis always up to date and specific to Your circumstances.
© 2024 Citigroup Inc. Citi, Citi and Arc Design and other marks used herein are service marks of Citigroup Inc. or its
affiliates, used and registered throughout the world.
2254563 02/24

DTCC DIGITAL ASSETS

For more information on our products and services, visit DTCC.com© 2024 DTCC. All rights reserved. DTCC and DTCC (Stylized) are registeredtrademarks of The Depository Trust & Clearing Corporation.