Between DeFi and security tokens, a mutual interest

Société Générale had recourse to the DeFi through the protocol MakerDAO in order to refinance a bonda security token. Its subsidiary SG-FORGE prepares other transactions on DeFi protocols. Interview.

In France, banks are still keeping their distance from crypto-currencies. However, they are fully investing in the field of security tokens. For Société Générale, initiatives already date back to 2019 with the issuance of the first secured bond on a public blockchain, Ethereum.

Were then issued 100 million euros of covered bonds in the form of security tokens, OFH Tokens. These tokens continue their life. They were used as collateral on MakerDAO.

Providing new financial services to investors

Through its subsidiary, Société Générale has therefore conducted a refinancing operation using a decentralized finance protocol (DeFi). For the bank, it is above all a new step in the digitalization of its services for institutional clients.

We now consider our ability to structure and issue financial securities in security token format to be in production, and is in fact being offered commercially to some of the bank’s clients,” says SG-FORGE’s general manager, Jean-Marc Stenger.

The first phase consisted of mastering the token operations for the primary market for issuers. However, the development of this new form of financial security also implies satisfying the specific needs of investors (asset managers, insurers, etc.).

One of their recurring needs is the use as collateral of financial assets held “to refinance and recreate liquidity by borrowing on the markets”. These “very classic” operations, as the head of SG-FORGE describes them, must therefore have their equivalent in the crypto finance.

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The potential for growth lies in particular in these operations at secondarywhich, in traditional finance, represents a larger volume of transactions than primary operations, reminds Jean-Marc Stenger.

Security tokens: a win-win for DeFi and TradFi

“It is essential for us to to master the whole chainfrom primary to secondary school,” he says. SG-FORGE also believes that DeFi solutions “can bring a lot to the traditional financial industry”.

Fluidity, automaticity and security of transactions in the crypto ecosystem are of definite interest to the TradFi on an operational level. DeFi is therefore an opportunity for the bank to offer innovative refinancing services while leveraging its strengths.

The refinancing on the crypto market, rather than traditional finance, offered Societe Generale “access to different financial parameters.” And this alternative can have advantages for the holder of the securities, starting with “the financial terms of the transaction” themselves.

These developments are fully in line with the roadmap of the specialized subsidiary of the Société Générale Group. MakerDAO is a first transaction in a progressive deployment. But certainly not the last.

We are in discussion with other protocols,” says the general manager.

The objective remains the same: to ensure that the parameters of an operation with a CAD are under control. And “this is not self-evident”.

Less risk, but a banking framework to be built

This control comes up against a real legal complexity to achieve a framework equivalent to that of the traditional financial markets.

“We benefit from a better operational efficiency. Counterparty risks are lower, as are settlement risks. On the other hand, there are still things to be tested, or even invented, particularly in terms of the legal structure of a transaction and its financial structuring, so that we can offer our clients appropriate conditions,” explains Jean-Marc Stenger.

The interest of a junction between crypto and TradFi is however mutual. The executive recalls that the crypto ecosystem suffers from “a lack of good quality assets. Most of the corners that are currently trading are very volatile and inherently risky. And the episodes of 2022 have added distrust”.

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TradFi is therefore a source of “quality assets, such as OFH Tokens, themselves collateralized by real estate loans and highly rated” for the crypto ecosystem, which expresses “a great appetite” for these tokens. This means interesting financial opportunities for these same assets.

But to benefit from this, “you need to create the bridge. That’s what SG-FORGE is all about.” The barrier to getting there is not technology. The industry needs “a standards-compliant banking framework (…) It takes time.

As evidence of this, the MakerDAO operation took a year of work, a time that includes, however, the time spent on community votes-i.e., the governance votes.

Priority to industrialization and refinancing before staking

What are the next steps for the subsidiary now? The first step will be to provide feedback on the MakerDAO transaction. It will also be a matter of “continuing to deploy this type of solution and to work on industrialization “, announces the general manager of SG-FORGE.

Industrialization will include both primary and secondary. Further primary issuance of security tokens is planned for 2023. So much for supply. What remains is to “enrich the range of financial services for investors and issuers (…) notably through refinancing solutions to gradually standardize this format with our traditional clients”.

What about staking? We’re not there yet,” replies Jean-Marc Stenger, who recognizes the interest in terms of return for an investor.

We don’t have any concrete projects on staking yet. It may come, but at this point it’s not on the agenda.”

The priority is “industrialization and the ability to diversify into these refinancing themes via DeFi protocols. These are our shorter-term topics,” he adds. By the end of 2023, SG-Forge wants to be “very pragmatic” about its objectives and results.

“Making plans for the next 12 to 18 months in this environment is very risky “, justifies its CEO. The latter is nevertheless pleased with the acceleration of the adoption by the bank’s customers.

“It is much faster than we had anticipated,” he says. “Customers now understand very well the advantages of switching to the security token format “.

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