By Bob Ras, CEO and co-founder of Sologenic
What’s in a Name? Defining Tokenization
Imagine a world where buying a share of a high-value stock or a piece of prime real estate is as simple as ordering a coffee. Recent advances in how financial institutions and the blockchain community are collaborating through tokenization are hastening this reality. But the impact of this trend may be much greater than simplifying the transfer of assets.
Tokenization, or the process of transforming securities and other Real World Assets (RWAs) into digital tokens on blockchain networks, serves not just as a technological innovation but as a prelude to a new global economic age. While past innovations in the financial sector, from electronic trading to mobile banking, have experienced a gradual ascent from niche products to mainstream financial tools, tokenization is being embraced at an unprecedented rate. The number of major financial institutions eager to gain a foothold in the space has fueled this ascent and indicates the technology’s potential.
Harnessing the Power of Blockchain Technology
Take, for instance, JPMorgan's pioneering blockchain-based collateral settlement transaction, carried out in collaboration with industry giants BlackRock and Barclays. This move, along with UBS Asset Management's launch of a tokenized Variable Capital Company (VCC) fund, underscores the momentum behind tokenization and its potential to be the cornerstone of finance.
The market opportunity these firms recognize is clear. Recent analysis from HSBC speculates that tokenized market volume could skyrocket to $24 trillion by 2027, accounting for 10% of the global GDP.
This profound evolution is strengthened by financial institutions’ growing confidence in blockchain's capabilities as they address long-standing challenges, such as enhancing transparency, mitigating risks of systemic failures, broadening accessibility, and drastically improving both transaction costs and speeds by reducing the need for multiple intermediaries.
Tokenization in practice…
One key idea born from tokenization is ‘fractionalized ownership’, which aims to make asset acquisition more democratic by dismantling traditional barriers to access, like geography and financial status. Every asset, no matter its assigned value or where it's located in the world, would be accessible to any individual, group, or organization.
Fractional ownership goes beyond democratizing investments - it serves as a catalyst for reinvigorating market liquidity, a vital component of robust capital markets. By dividing high-value assets into smaller, more accessible portions, formerly stagnant markets may undergo a resurgence of liquidity. This in turn increases trading volume and drives up asset values, while creating new markets in the process.
Liquidity is the lifeblood of markets and the fuel of global economies. An influx of investments will drive capital formation, encourage innovation, and create more jobs. The resulting economic buzz will likely lead to more consumer spending, further fueling the growth cycle.
Tokenization also has a flywheel effect by speeding transaction processing. Thanks to the real-time settlement feature inherent in blockchain, a 24/7 financial ecosystem emerges, ensuring instantaneous transactions. This transformation morphs the global financial marketplace into a continuously active hub, where non-stop trading activity sustains the economic engine at all hours.
Underpinning this growth are the underlying infrastructure technologies building the railways to connect traditional finance with blockchain and simplifying the maze of traditional trading and asset transfers. A simple click could reveal the economic value of assets, cutting through the red tape that currently slows down financial transactions.
…is not without its challenges
But while tokenization may seem like a no-brainer technology to implement, the road to incorporating this tech into our financial infrastructure is not without its challenges and often requires institutions to commit to investing in future technology.
The most obvious hurdles are technical challenges. The finance industry’s tolerance for errors and downtime is low to non-existent, meaning tokenization solutions need to be perfected and rigorously tested before being incorporated.
Additionally, given the current regulatory climate, institutions have to overcome regulatory uncertainty in order to provide tokenized assets to their clients. In many jurisdictions, there is no clear regulation when it comes to providing access to tokenized assets, and, even when regulation exists, it often varies greatly by jurisdiction.
Investing in tokenization requires institutions to accept the initial cost of implementation. Like any investment in financial technology, cost to build the necessary infrastructure, particularly a proprietary solution, can be high. Many institutions will opt to manage two operations in parallel as they implement tokenization offerings – allowing clients to choose between legacy and tokenized infrastructure.
Finally, institutions will need to overcome challenges with public perception before reaping the benefits of tokenization. For institutions, client trust is everything, and maintaining their brand reputation is paramount. Tokenization is a relatively new technology, especially to the risk-averse. However, we’re already seeing the first cracks in the dam with major banks, such as HSBC throwing their support, and their reputation, behind tokenization by launching platforms for their clients.
The road ahead
The journey towards a tokenized financial ecosystem may present its challenges, but is not a step towards modernization; it's a giant leap towards a global economy brimming with vitality and boundless opportunities. Tokenization can foster a more seamless connection between various economic sectors, bringing harmony to global finance.
Bob Ras is the CEO and co-founder of Sologenic, an ecosystem that facilitates the process of low-cost, on-demand, and secure tokenization of non-blockchain assets on the XRP Ledger.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
