Tokenizing real-world assets into digital forms is projected to tap into a significant total addressable market, while also offering considerable cost-saving opportunities. In the financial services realm, a digital asset represents a digital counterpart, or “digital twin,” of an actual financial asset. These digital assets often take shape as tokens, which can be implemented and operated on blockchain technology or similar distributed ledger systems (DLT). On such platforms, these tokens can be issued, distributed, and traded as financial instruments on secondary markets. AWS customers from various sectors are actively investigating how this technology can cut operating costs, foster new markets, and create innovative products that generate new revenue streams. For a more comprehensive introductory overview of tokenization, you can check out this related blog post.
In the outlined use case, a transfer agent oversees the issuance and distribution of digital tokens, ensuring that each token accurately reflects the value and rights of the underlying assets while maintaining ownership records and managing transactions. Digital asset custody involves the secure storage and management of these digital assets, which typically requires specialized infrastructure, including secure storage solutions, private key management, and adherence to evolving regulations surrounding digital assets.
Often, third-party custodians or dedicated digital asset custody providers—like banks, fintech firms, or solutions providers such as Fireblocks—handle custody duties, enabling transfer agents to concentrate on the issuance and transfer processes. This division of responsibilities ensures that digital asset custody is managed by entities equipped with the necessary security measures, legal oversight, and technical expertise to protect these assets.
Fireblocks is a robust platform that provides secure infrastructure for moving, storing, and issuing digital assets, empowering financial institutions, Web3 companies, and payment providers to expand their digital asset operations. The solution architecture discussed in this post strategically integrates Fireblocks’ security and token lifecycle management with various AWS services, offering comprehensive protection, scalable operations, and streamlined governance for diverse tokenization applications.
It’s important to note that the architecture presented here is not intended as a strict implementation guide, as different institutional brokers might set up their infrastructure based on their specific business and technical needs. Instead, this architecture serves as an illustrative example demonstrating how the existing technical infrastructure of a financial services institution, like a bank or asset manager issuing a tokenized digital asset, can interface with a specialized ISV provider, in this instance, Fireblocks, via AWS to engage in an industry-wide tokenization network utilizing public distributed ledger technology.
The Tokenization Business Use Case
This use case centers on tokenizing a financial asset sold by a financial institution, such as a holding in the custody of a bank, where fractional ownership is issued by the bank and traded by participants in the tokenization network. The tokens represent a bearer claim on a portion of the underlying asset held by the custodian bank. By converting fractional ownership of such an asset into tokens on a decentralized system, multiple organizations can engage in the lifecycle of the tokenized asset without intermediaries, thereby reducing costs and enhancing efficiency. This use case is depicted in the diagram below, illustrating how a financial institution serving as a transfer agent platform provider can offer a cryptographically secure, peer-to-peer record of ownership and enable a fully electronic secondary market for trading these digital assets.
This conceptual implementation facilitates a custodian institution acting as a transfer agent to issue, transfer, and redeem tokens on the decentralized network. The diagram below presents an overview of the participants involved in a digital asset tokenization lifecycle.
Figure A – Overview of the Asset Tokenization Use Case Example
In this scenario, for simplicity, a single transfer agent manages both issuance and custody functions, which could represent the role of a global investment bank in capital markets. The architecture also illustrates how asset ownership records on a distributed ledger can be seamlessly integrated with traditional order systems within the enterprise’s core infrastructure.
For this post, we will focus on the issuance, transfer, and redemption workflows:
- Issuance – The process of creating a new token for a designated potential owner begins with verifying the customer for KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements, establishing the commodity’s market price, submitting an order, and minting a new token to represent the new owner’s stake in the asset.
- Transfer – Ownership of the asset is transferred from one owner to another, with both parties validated by the issuer and the platform. The actual transfer occurs via smart contracts on the distributed ledger, and corresponding “off-ledger” records are updated after the ledger transaction is confirmed.
- Redemption – To redeem their tokens, the holder initiates a redemption transaction on the blockchain network. This transaction directs the token issuer or a designated redemption mechanism to exchange the tokens for the underlying asset or service. After redemption, the tokens are typically removed from circulation or retired from the blockchain through mechanisms such as token burning.
Solution Architecture Overview
The diagram below depicts a conceptual solution architecture that spans on-premises applications, AWS applications, and the Fireblocks platform. While only key functional aspects relevant to core tokenization workflows of issuance, transfer, and redemption are illustrated, this architecture can be expanded to support various other workflows. General infrastructure considerations like high availability and disaster recovery, although critical, are not discussed in detail here; for guidance on these topics, refer to the AWS Well-Architected Framework.
Figure B – Reference Architecture for Tokenization Application on AWS with Fireblocks
The solution architecture supports two primary functional workflows:
- Tokenization Request Flow: Requests for tokenization actions.
- Tokenization Response Flow: Responses from executing the requested actions.
These two workflows are described in detail in the next section, with references to corresponding icons on the architecture diagram.
Tokenization Request Flow
The solution is designed to accommodate a wide range of tokenization action requests initiated by existing mission-critical systems, such as order systems, liquidity feeds, KYC/AML, and regulatory reporting systems. Additionally, for further insights, you can check out another blog post here.
In conclusion, this solution showcases how institutions can leverage AWS and Fireblocks to create a secure and efficient tokenization environment, enhancing their capabilities in the evolving digital asset landscape. For a deeper understanding of this topic, this resource is an excellent reference.
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