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Global Finance Set for Major Shift through Tokenization and Unified Ledgers




The ability to convert Real-World Assets (RWA) into blockchain-based tokens – known as ‘tokenization' – is set to lead the next wave of financial innovation.  This sentiment was recently shared by investment firm Bernstein in a research paper, suggesting that the market for tokenization may be worth as much as $5 trillion within a 5-year span.  This prediction was founded primarily by the growth of stablecoins and CBDCs in recent years, along with the transformation of more traditional asset classes that include securities, and real estate.

The Appeal

So what is the appeal behind tokenization?  Bernstein believes, simply put – tokenization has the ability to offer improved liquidity in traditionally illiquid asset classes, enhanced accessibility for investors, and unmatched operational efficiencies overall.  As a whole, these benefits make RWA tokenization an attractive prospect for the financial sector.  These are the benefits afforded that will fuel adoption, and the transformation of traditional finance.

A Shift from SWIFT

Alongside the growth of tokenization, there is a shift occurring in the structuring of the current global financial system.  For example, the Bank for International Settlements (BIS) has recently proposed a unified electronic ledger that could consolidate CBDCs with tokenized money and assets on one platform, powered by automated smart contracts.

The existing monetary system, which is reliant on third-party messaging systems such as SWIFT, could be transformed by this new ledger; the goal of which would be to eliminate delays and uncertainty.

The BIS believes that its proposed system could provide novel methods for securities settlement and enable tokenized deposits with integrated regulatory checks for wholesale CBDCs.  Additionally, the system could lower the cost of doing business for smaller companies, opening up new doors along the way through strengthened balance sheets.

Ideas of Innovation

In its recent look at how tokenization and the use of smart-contracts can improve the existing financial system, BIS noted the following areas as being ripe for innovation.

  • New methods for securities settlements that combine all the individual steps into one seamless transaction.
  • Tokenised deposits with built-in regulatory checks that simultaneously settle in wholesale CBDC.
  • Smart contract-enabled credit that reduces the cost of trade finance for smaller companies, improving global supply chains.
  • Enhanced sharing of data on potential borrowers, using privacy-protecting technology, to expand access to credit for disadvantaged segments of the population.

Hurdles Still to Be Cleared

It should be noted that the path forward for the mass adoption of tokenization practices is not a straight and easy one.  As with any new technology, there will be challenges faced along the way – the primary of which are regulations with regard to tokenization.

One of the issues involving regulation is a purported lack of understanding among policymakers toward what blockchain technologies can offer.  Without a thorough understanding of the underlying technology, it is unreasonable to expect thoughtful regulation.  Rather, expect rules and regulations that maintain the status quo until a true understanding is attained.

A potential unified ledger for cross-border payments is also not without hurdles.   Due to its scale, coordination and cooperation would be required across a variety of jurisdictions, meaning that any development and adoption would be slow-moving   For now, BIS believes that,

“Given the unpredictable nature of innovation, the focus should be on building a monetary system that is adaptable enough to support safe and sound innovation by the private sector, in any form that this may take.”

Final Word

If projections and actions being shared by entities such as Bernstein and BIS are indicative of things to come, it would appear as though,“We are at the cusp of another major leap in the monetary and financial system, which will have far-reaching consequences for the economy and society at large…This would be a game-changer in how we think about money and how transactions take place”, as put by BIS Head of Research, Hyun Song Shin.

The next five years will be pivotal in determining the trajectory of these transformative technologies.

Daniel is a big proponent of how blockchain will eventually disrupt big finance. He breathes technology and lives to try new gadgets.