Citigroup Collaborates with Ava Labs for Tokenization PoC

Citigroup, in partnership with Ava Labs, traditional financial institutions, and digital asset firms, recently completed a proof-of-concept aimed at tokenizing private equity funds. Despite existing legal and technical hurdles, Citigroup remains optimistic about the potential of blockchain development services to revolutionize the private equity sector.

The initiative of Citigroup involved simulating workflows within a private equity fund issued by Wellington Management, with ABN AMRO acting as the investor and WisdomTree providing the platform on the permissioned Avalanche Evergreen Spruce Subnet of Ava Labs.

Integrating Smart Contracts 

Smart contracts were tested to enforce distribution rules for the simulated fund, with various methods employed to verify identities provided by WisdomTree. Additionally, Citigroup collaborated with DTCC Digital Assets to utilize a private fund token as collateral in an automated lending contract, subject to specific parameters.

According to Citigroup's report on the project, blockchain-based tokenization offers benefits such as standardization, automation, and improved operational efficiency. However, unresolved legal issues, including regulatory compliance, contractual rights, and taxation, pose significant challenges.

The report emphasizes the importance of mature identity standards and secure data flows to ensure successful private fund tokenization. Furthermore, addressing technical issues such as end-to-end data rails and tokenized cash legs is crucial for facilitating seamless settlement.

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Despite Skepticism, Citigroup Moves Ahead

Despite the remaining obstacles, Citigroup believes that with a flexible approach, blockchain technology has the potential to transform private equity markets. The bank has long been bullish on tokenized assets, particularly private equity, which it considers a "killer use case" for crypto.

Other entities, such as hedge fund Brevan Howard and investment manager Hamilton Lane, have explored similar tokenization efforts using protocols like Libre on the Polygon network.

WisdomTree, Wellington Management, T. Rowe Price Associates, and Cumberland previously participated in an initiative on Avalanche's Spruce subnet, testing blockchain's application in foreign exchange transactions.

Citigroup's Token Services blockchain, established in September, aims to provide liquidity and automated trade finance solutions for the bank's institutional clients.