Known for prolific business networking, Polygon Labs hit another adoption milestone. This time, the Bank of Italy (central bank) selected Ethereum’s scaling network to interface financial institutions with decentralized finance (DeFi) protocols.

With crypto custodian Fireblocks, Polygon will be an onboarding rail for Italy’s TradFi experiments into DeFi. Is this the beginning of a real-world assets (RWA) tokenization trend?

Why Central Banking and DeFi?

It may seem odd that a central bank would dabble into its opposite – decentralized finance. However, there is only so much innovative talent to go around. This is why the Italian central bank established the Milano Hub.

Like Singapore, Hong Kong, and the UAE’s crypto hub initiatives, the Bank of Italy deployed the Milano Hub in late 2020 to push the FinTech envelope three years after establishing the Fintech District for international startups.

Like the Fintech District, the Milano Hub is a virtual and physical space to host Italy’s financial digitization efforts, particularly integrating blockchain technology into the existing financial system.

Foremost, the Milano Hub aims to bind public, academic, and private market innovators and participants to “best balance innovation and compliance with applicable rules.”

How Will Polygon Help TradFi?

The Ethereum blockchain has become DeFi’s cornerstone, while Polygon has become one of its most extensive scaling solutions after Arbitrum at $1.18 billion total value locked (TVL). Taking the traffic load off Ethereum’s mainnet while providing low transaction fees, Polygon is also heading for a major tokenomics overhaul.

In that capacity, Polygon will support the development of institutional DeFi. Cetif Advisory, TradFi’s research consultancy firm from Milan’s Università Cattolica del Sacro Cuore, laid the groundwork in March.

Back then, Cetif Advisory coordinated between Fireblocks, Reply developers, and Linklaters tax consultancy to deploy institutional tokenization of securities. As blockchain-based assets, the purpose of security tokens is to improve traditional stock trading drastically.

Under real-world asset (RWA) tokenization, securities are inherently primed to be hosted on blockchain networks.

Security Tokens as the First Wave of RWAs

As revealed during the GameStop short squeeze, the traditional investing system suffers from multiple vulnerabilities and inefficiencies. In contrast, security tokens are tradable 24/7 while operating on a unified network, significantly increasing liquidity.

Likewise, security tokens, run through automated smart contracts, can offer lower transactional costs while providing equal or enhanced regulatory compliance. After all, the key feature of blockchain-based ledgers is their transparency.

Imanuel Baharier, General Manager of Cetif Advisory, holds that DeFi is the proper infrastructure for already regulated institutional players.

“We believe it is vitally important to create the conditions for DeFi to become a safe and open operating environment for supervised entities as well,”

With that goal in mind, the Bank for International Settlements (BIS) published its paper on a global Unified Ledger concept this June. It would support central bank digital currencies (CBDCs) and tokenized deposits into commercial banks, such as securities and other digital assets.

BIS and IMF to Colonize DeFi?

In the paper, BIS is dismissive of the wider crypto system, without the credibility lent to it by the central banking system.

“Not only is crypto self-referential, with little contact with the real world, it also lacks the anchor of the trust in money provided by the central bank.”

Polygon’s selection to facilitate securities tokenization is an effort to break that legitimacy barrier. More precisely, to bridge the gap between TradFi and digital assets that “reside in siloed proprietary databases, located at the edges of communication networks.”

In sync with BIS, the International Monetary Fund (IMF) proposed a cross-border multi-currency ledger the same month, estimated to save $45 billion in transaction fees annually.

However, after the tokenization experiments facilitated by Fireblocks and Polygon are completed, it is unclear how self-ascribed DeFi networks interface with the proposed ledgers. As the world’s largest capital market, the US crypto legislation will undoubtedly play a significant role in future rollouts where DeFi meets TradFi.

This article originally appeared on The Tokenist

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