If initial tests are successful, the firms will expand their activities into tokenized credit issuance and equities.
Financial market firms T. Rowe Price Associates, WisdomTree, Wellington Management, and Cumberland have joined an Avalanche AVAX $18.96 subnet to test the idea of blockchain-based foreign exchange, according to an announcement from the Avalanche team. The new subnet is called “Spruce,” and is part of Avalanche’s Evergreen Subnet ecosystem.
According to the announcement, institutions will initially use “valueless tokens” on Spruce to ensure they can conduct foreign exchange, or forex, transactions without losing capital. Interest-rate swaps will also be tested early on. Over the long run, successful tests will allow these firms to experiment with further attempts at blockchain settlement, including “the exploration of tokenized equity and credit issuance, trading, and fund management.”
The announcement said that Spruce offers compliance features to help keep institutions within the parameters of the law. Firms that want to use it must first pass Know Your Customer (KYC) verifications, and once they complete this process, they receive non-transferable tokens, or NTTs, identifying them on the network. Their wallet addresses are also whitelisted “at the chain level” after verification.
Will Peck, head of digital assets at WisdomTree, said that he believes Spruce will be an important step in bringing greater efficiency to traditional financial transactions:
“We believe tokenization and blockchain will play an important role in financial services going forward. Avalanche Spruce provides an opportunity to further explore the potential efficiencies and benefits of on-chain trading and settlement with other financial institutions. We are looking forward to experimenting in this EVM-based testing environment.”
On April 6, Avalanche announced the launch of the “Evergreen” subnet protocol, which allows institutions to create customized blockchains with compliance features. At the time, a representative from Ava Labs said these subnets were needed because previous solutions, such as Corda and Hyperledger, were not interoperable enough for the needs of large institutions.
Spruce is one of two Avalanche Evergreen subnets launched since the protocol was released and listed on the Avalanche website. Intain, an Evergreen subnet focused on structured finance, is the other.
A January joint study from Uniswap and Circle argued that the cost of forex could be reduced by as much as 80% by putting transactions on a blockchain network. Experts such as Ralf Kubli of the Casper Foundation have argued that tokenization may help to prevent a future financial crisis.