In the cryptocurrency space, tokenization is the latest buzzword, which attracts not only the Web3 the natives but, more importantly, the giants of the world of traditional finance (TradFi). With all the innovations in finance over the past few decades, the industry continues to follow tradition in terms of intermediaries and limited availability, unlike today’s fast-paced digital world.
To address this, companies are capitalizing on trends such as tokenization, which has the power to revolutionize the financial landscape by changing the way investments are managed, used and monetized.
Tokenization is a process in which rights to an asset are converted into a digital token on a blockchain, and ownership rights are exchanged and transferred on a digital platform. Almost anything can be tokenized, which includes but is not limited to:
- Gold, art
- Real estate
- Luxury items
- Contracts with US Treasury bonds
- Public and private investment
- Investment Funds
Tokenization of real-world assets is expected to be a multi-trillion dollar market, currently standing at around $300 billion.
The effectiveness of tokenization
The current financial system is riddled with delays, complexity and inefficiency. Using blockchain technology, tokenization brings increased efficiency, reduced costs and increased transparency. Additionally, it increases the liquidity of traditionally illiquid and non-splittable assets.
“What we’re going to see are markets that have historically been inefficient become much more efficient,»
– said Pat O’Meara, CEO and President of Inveniam, speaking about tokenization during a keynote speech at the TokenizeCe inaugural conference by the Security Token Market (STM).
By representing physical assets as digital tokens on a distributed digital ledger, it is possible to unlock the value of real-world assets and trade them in real time. Unlike traditional markets with fixed trading hours, the crypto space allows these tokens to be traded 24/7. Improving liquidity is one of the most important benefits of tokenizing real-world assets, in addition to increased investor confidence through the transparency built into blockchain technology, which reduces the risk of ownership conflicts .
Over the past centuries, banks have served as trusted intermediaries between individual parties, businesses, cities, and states. But tokenization removes these entry barriers prevalent in traditional financial markets and reduces costs.
Even the US Federal Reserve is keenly interested in tokenization, as Fed Governor Michelle Bowman showed earlier this month. noted that:
“Because new digital assets are currently focused on tokenizing certain traditional or even new types of money, tokenization is a research topic for the Federal Reserve and for central banks around the world.”
According to her, this topic will also shed light on other problem areas, including “stable coin regulation, supervision of new banking activities and efforts to improve the current payment system.“
Access to markets through new, innovative routes
From an investor’s perspective, tokenization has big implications, as the ability to turn real-world assets into tokens can pave the way for a whole new world of products and services, enabling every person and organization in the world to diversify its investment portfolio. on a global scale, regardless of their income or size.
“This allows people to access capital markets in innovative ways, without there being choke points controlled by incumbents (such as banks) extracting rents.”
– said O’Meara of Inveniam, a platform with $80 billion in assets.
As investors benefit from increased democratization and access to previously unavailable assets, entrepreneurs can access a broader pool of investors and scale more quickly.
But for investors, it’s not just about accessing previously unavailable markets, but rather having a better way to store value. O’Meara expanded on this topic at the TokenizeThis conference by highlighting how banks have acted as a trusted intermediary between individuals, businesses, cities and states. In this role, the bank deploys its clients’ funds in the expansion of the means of production, civil infrastructure and technological innovation, and it has been “a considerable impact by stimulating creation and innovation.» For the customer, however, this means assuming the business risk of this bank.
Today we are witnessing an evolution in which banks are becoming the primary mechanism by which excess capital is distributed for innovation and the creation of economic means created by individual actors, businesses, entrepreneurs, technologists and governments that build infrastructure to “this global economy where the Internet connects the supply chain,” said O’Meara.
Transforming Stored Value Delivery
Besides the economics of delivery, blockchain and the Internet of Value are also transforming the delivery of stored value by removing these banks as middlemen – trusted intermediaries.
However, this does not mean that the role of a bank will disappear; it would rather be modified »dramatically” where banks will not play the role of central intermediary, argued O’Meara.
“What we’re going to do is make people able to store their value away from perceived risks and participate in a global economy.”
According to O’Meara, in this next iteration, we do not need an intermediary oracle of a bank where the medium must be a currency; instead we can begin to tokenize a real-world asset. “This real-world token asset has daily, weekly, monthly and quarterly liquidity modifying the store of value,” he said.
He argued that as a saver, which represents a large part of the global middle class, one is negatively affected by the central bank’s monetary policy of printing money, as these savings deflate every month, every year. But if you own or create assets, you are protected from this inflation.
Tokenization of real-world assets allows people to invest their money in a real-world asset that inflates with currency. This means that as long as fiat currencies like the dollar, euro or pound disappear, “they will exist in a world where Bitcoin is next” said O’Meara.
Involvement of DeFi in tokenization
Tokenized real-world assets are a promising financial industry innovation that can modernize and reshape the financial landscape. And as the crypto market matures, momentum is growing to tokenize the multi-trillion dollar global financial services industry. However, the adoption of tokenization is still in its early stages and it may take some time for it to become widely accepted. Nonetheless, the technology can change the way we manage and invest in real-world assets, and it is already seeing its applications around the world. decentralized finance (DeFi) sector.
Real-world assets play a crucial role in DeFi, with protocols increasingly leveraging traditional credit markets such as equity and debt financing. After all, the market potential is enormous, with credit fueling trillions of dollars of businesses and most of the global economy.
While DeFi primarily uses digital assets, real-world assets like stocks, commodities, or houses are crucial for connecting to the established financial system. By tokenizing these assets, DeFi platforms allow users to access, trade and use them in a decentralized and borderless manner. Additionally, real-world assets reduce risk, open up diversification opportunities, and bring more stability to DeFi.
Integrating real-world assets on-chain and into the DeFi ecosystem not only provides market efficiency and access to liquidity, but also unique collateralization opportunities not found in marketplaces traditional.
For the DeFi ecosystem, this means new investment yield opportunities, significantly higher than those of existing DeFi projects, providing access to sustainable revenue opportunities. Additionally, it provides access to various off-chain markets and expands the customer base to traditional finance.
Already, a certain number of dApps have tokenized hundreds of millions of dollars in assets. However, according to O’Meara, we will eventually start to see new types of DeFi protocols, and this will be the stage where DeFi is integrated with traditional commercial banks and mortgage banks.
At this point, people will be able to say what is the cheapest source of capital for me? Is it a traditional bank? Am I the one going to the capital markets, to the institutional ones, or can I operate a DeFi protocol directly? O’Meara said, adding that this would fundamentally change the role and way we communicate trust.
This future will not be dominated by a single blockchain, however. With the proliferation of layer 1s, each with their own strengths, weaknesses and ecosystems, DeFi protocols will use multiple blockchains, as we are already seeing.
“We are going to live in a multi-channel world,“, O’Meara said. He further noted that such a future “consider banks providing credit as a primary function, but not as a control function, but rather as a payment access and output mechanism.” According to him, in the coming decades, the role of banking will be completely redefined, and only those who have digital relationships with their customers will survive.
“I think that people will trust the banks which will manage the assets and act as an oracle on prices, these will exist in the long term,” said O’Meara.
He further stated that the custody and portfolio function will be “primordial” in the future with the complete tokenization of real-world assets. This tokenization of the capital stack, which he called 1.0, is not here yet, but “we’re getting there.“
Join the waitlist for TokenizeThis April 11-13, 2024, via summit.stm.co.