Tokenisation: A New Era of Digital-Ledger Technology
The Resurgence of Tokenisation
Bitcoin’s record-breaking rally is rekindling hope that the digital-ledger technology that underpins cryptocurrencies will revolutionise everything from recording the ownership of houses to bonds. Tokenisation, or the process of creating digital representations of real-world assets on a blockchain, has become one of this year’s buzzwords in both conventional and crypto finance circles. The excitement is reminiscent of the hype of a few years ago surrounding the use of blockchains for everything from tracking lettuce at Walmart to digitising stocks, which proved to be premature.
Challenges and Opportunities
For years, tokenisation of assets beyond stablecoins that serve as a proxy for actual currencies in crypto trading has flagged. Only some 67,530 parties – mainly institutions – hold tokenised assets that are not stablecoins, according to data tracker rwa.xyz. Just 0.003 per cent of the total value of the world’s assets has been tokenised, and many companies behind the projects are on the brink of going out of business, researcher Opimas said.
Regulatory Environment
An unfavourable US regulatory regime was to blame in large part. For years, regulators encouraged banks to avoid crypto and related risks. While tokenised securities run on blockchains and adhere to the same rules as traditional securities, regulators often lumped them together with crypto as deserving heightened scrutiny. So many financial services providers chose to stay away, and instead invested in areas such as artificial intelligence (AI).
A New Era of Tokenisation
That’s starting to change, as president-elect Donald Trump plans for a more favourable regulatory regime for crypto, and with the world’s biggest asset manager, BlackRock, launching a tokenised money-market fund this year. That’s pushing others to follow. "Now they felt like they are able to do something and sped up their timeline a lot, whereas previously they were just watching," said Charlie You, co-founder of rwa.xyz. "They are making things happen."
Gearing Up for More Traction
In October, card network Visa rolled out a platform that lets banks issue fiat-based tokens. In November, stablecoin issuer Tether launched a tokenisation platform. The same month, Mastercard announced it’s connected its token network with JPMorgan Chase to settle cross-border business-to-business transactions on the bank’s Kinexys blockchain-based platform, and sees an opportunity for introducing such payment schemes to more financial institutions.
Conclusion
Tokenisation is also being touted as increasing an asset’s liquidity, making it accessible to more investors, while cutting costs and transaction time. By tokenising those assets, it enables natural efficiency, said Rob Krugman, chief digital officer at Broadridge, which has tokenised trillions of US dollars worth of repos. It may even be bigger than the internet. It’s fundamentally rethinking the way the markets work.
FAQs
Q: What is tokenisation?
A: Tokenisation is the process of creating digital representations of real-world assets on a blockchain.
Q: What are the benefits of tokenisation?
A: Tokenisation can increase an asset’s liquidity, making it accessible to more investors, while cutting costs and transaction time.
Q: What are the challenges of tokenisation?
A: Some industry participants worry the stampede could lead to tokenisation of assets that should not be tokenised, and to expose investors to new risks, such as those of hacks. Investors may also unwittingly end up paying more fees for tokenised versus traditional products. Or with assets that are hard to sell.
Q: Is tokenisation the future of finance?
A: Yes, tokenisation has the potential to revolutionise the way the markets work, but it will take time and effort to develop and implement.
