Tokenization Spotlight: How Libre Unlocks Institutional Adoption With Automated Compliance

Onchain real world assets are Tradfi's gateway to Web3. This is the first in a series of posts highlighting projects spearheading the $4 trillion tokenization wave.

Polygon Labs
January 18, 2024
Image source: Dribbble

The announcement of Libre earlier this month opened a door for institutions to access next-gen blockchain technology. Libre is a Polygon CDK-powered L2 chain for institutions to easily and compliantly issue tokenized assets. Libre creates better UX and saves fees by sidestepping inefficient intermediaries, but does so in a compliant way.

And it’s just this characteristic, automating away intermediaries, that is one of the most powerful value props of blockchain technology, according to Libre founder Dr. Avtar Sehra.

As a pioneer of tokenization, Sehra has been working to bring real world assets onchain before the term “tokenization” was a well-defined concept. Trained as a particle physicist, Sehra left academia for finance, where he worked as a quantitative analyst for a number of years.

But crypto caught his eye early on. Sehra began innovating with the idea of bringing securities onchain in 2014, working and experimenting not only with Colored Coins, in the early Bitcoin era, but also later founding his own company, Nivaura, that engaged with regulators to issue financial instruments onchain. 

There was a name for what he was doing, although it hadn’t yet caught the imagination of the financial world: tokenization, or minting an onchain representation of some offchain asset. 

Fast forward to today. Tokenization is all the rage, with every major financial institution investigating this technology–and much of it happening on Polygon. Estimates vary, but Citigroup projects the number of tokenized assets at more than $4 trillion by 2030. 

Sehra’s latest innovation is coming online just as the technology has really begun to take hold.

Libre, launched with backing of WebN and Laser Digital, is a dedicated institutional L2 chain built with Polygon CDK that will serve as an infrastructure for the compliant issuance and distribution of tokenized assets. Leading alternative investment management firm Brevan Howard and leading private markets investment management firm Hamilton Lane plan to be the first issuers to strategically partner with Libre.

In this discussion, we talk with Sehra about how Libre has been designed to match asset types with potential consumers in a regulatory compliant way; how tokenization can smooth out the many inefficiencies of finance; and the importance of this technology for democratizing access to (currently) illiquid markets. 

On the one-sentence importance of Libre

Ease of compliant asset issuance and distribution for institutions, and ease of access for investors.

On how efficiencies lead to democratization

So Libre is what I like to think of as the next generation protocol of tokenization. Just to give you an idea in terms of how I see the world.

Right now, institutions are setup to service large ticket sizes because they're doing everything in a manual process. They're interacting with users, they're onboarding them, they're manually running checks. Everytime there is a transaction, it's quite a cumbersome ordeal, involving a number of processes, sometimes across a number of intermediaries, all of which adds to the transaction costs and time. 

So that’s the current system. But suppose you want to make it more efficient, to automate some of these processes? 

When you start doing that, then you start saying, okay, the only two parties that really matter are the asset manager, where the fund is coming from, and then the distributor that interacts with the end investor (a tier one wealth manager, etc.) – those are the principal parties of concern.

What Libre does, as a protocol, is it connects these two parties together seamlessly, with the assumption that everything between them, a lot of that infrastructure in the middle, can be automated. That is essentially how this becomes “institutional decentralized finance,” because the protocol can connect these primary parties, the fund and the distributor/investor, without any of the other manual activities and institutions. 

Now, from a compliance perspective, the reason some of these institutions in the middle have a purpose is to meet regulatory needs–not to mention all these other kinds of operational processes and policy requirements that, currently, these intermediaries fulfill.

Our vision is that there is a technical fix to this that will satisfy compliance requirements. That, in other words, the technology we’re building for Libre–to compliantly match funds with appropriate investors–can automate and replace most of the activities the intermediaries undertake, making the end to end processes not only for a more efficient and cost-effective system, but one that will ultimately be more democratic, as well. 

In most cases, some of the intermediary firms may have a regulatory oversight role, which still needs to be there, but once you remove the manual operations, the oversight role and control activities  also becomes more effective. 

The vision for Libre, in other words, is to create a protocol that automates compliance, while creating an environment for institutions to easily issue and distribute tokenized assets. 

Once you have that efficiency, it naturally follows that the ticket size goes down. Institutions are no longer paying a large amount of fees, and it becomes economically viable to service smaller tickets. 

On what DeFi can look like with Libre 

Even when workflows and processes are digitized–documents, reporting, access to single or multiple dealers on the marketplace– at the end of the day, these are always essentially controlled by a centralized platform.

This is true even though there are some regulated securities that have been tokenized and some automation on smart contracts with various things like delivery versus payment or other automations. There are still intermediaries and inefficiencies that are wedged between the two primary parties.

Now, the founding belief of Libre is that relying on a centralized platform isn’t where the workload is going. A customer should not be reliant on any of this. 

You should be able to interact with the protocol completely onchain. You should be able to do essentially what is done in DeFi today, where access to an interface isn’t a requirement. You can interact with smart contracts directly, rather than going through some central access point.

That’s what Libre unlocks, for institutions and distributors/investors. If an institution wants to issue an instrument, tokenize an asset and distribute that, a customer can interact with a protocol directly onchain. There doesn’t have to be an interface to enable issuance. 

We're developing institutional infrastructure to allow an institution like Brevan Howard to say, okay, we’ll issue something onchain and the distributor can, in a compliant way, enable their investors to interact with the protocol in a compliant manner regardless of the location and type of investor. No need to go through intermediaries.

Such compliant workflows are essential for institutional DeFi, which we think is the future. 

On the technology of compliance

If you talk to any tier one institution, one of the most pressing questions is: how do we make it efficient for ourselves to service smaller clients?

That’s the billion dollar question. A problem is, obviously, that onboarding the user and ensuring that particular asset or instrument is aligned with the investor. Are they in the right jurisdiction? Have they been categorized in the right way? Is the instrument aligned with them? It’s not only about KYC; there’s also AML (anti-money laundering), personal categorization, residential and tax jurisdictions, all of these kinds of categorizations. 

Depending on the criteria, when an institution establishes a fund, the fund permits access to certain things, but with specific conditions. 

What we’re building for Libre Is an onchain solution that essentially answers these questions. When users get setup onchain with Libre, that comes with particular technical flags. And if a user’s flags are not aligned with a particular instrument or asset, then the user can’t execute. 

So essentially, what we are developing are pools that are extremely granular, essentially a matching engine for instruments and users to ensure that they are aligned from a compliance perspective. 

And once this is done on scale, it allows the whole compliance solution to work a lot more seamlessly.

Now, if you take an investor who has been onboarded by a tier one institution, and set them up onchain, they can now automatically see all the instruments that are available to access. That makes the institution’s job easier i.e. making distribution of assets faster and cheaper. We give institutions a very clear view: here is what your client can access, compliantly, and all this information is through the protocol. However, the distributor still has the job of onboarding and setting up their users, but then the ongoing management and execution becomes much easier.

On what the future might look like

Opening to a larger user base will require regulators being able to see what’s possible with this technology. 

So whereas certain funds right now may only be accessible through distributors and or by certain types of investors, due to ensuring compliance, there may be possibilities of building access criteria into the protocol, and enabling a self service interface for end users. With such solutions available to regulators and institutions you can easily see the ticket sizes for these funds drop dramatically. 

In other words, right now there are illiquid markets that are tailored to only a small segment of the population. This technology can make it much easier for investors of any size to access different kinds of assets, and to do so in a regulatorily compliant way.

Over the next 10 years, this is where we think it will be going, and we want to be at the forefront.

Be sure to follow Sehra on X (@avtarsehra), and keep up-to-date with Libre’s journey (@librecap). 

This was the first installment of Tokenization Spotlight! Through a series of interviews, readers will learn what tokenization means, what it democratizes, how it can transform different industries, and get to know some of the projects building tokenization use cases with Polygon technology. 

Each Spotlight in the series is part of a campaign on Galxe

Now that you’ve finished reading, head over to Galxe and type in the password, “nextgen,” to be eligible to mint an NFT that corresponds to this article. The theme is New Frontiers, and the first NFT trait is “The Banker.” 

Tune into the blog and our social channels to keep up with updates about the Polygon ecosystem.

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