A growing number of leaders are extolling the opportunities of tokenization in financial services. Its basics are relatively simple: the linking of financial assets to digital tokens traded on distributed ledgers, including blockchains, whereby the tokens reflect the fair value of the underlying assets. While the challenges of tokenization are complex, the benefits of tokenization promise to be transformative.
Looking into a tokenized future
Various financial services providers are projecting that tokenization in financial services could generate trillions of dollars in new value this decade. And while these estimates may elicit skepticism among some, they would likely represent just a tiny fraction of the global market of assets that has the potential of being tokenized. Think of the many sectors with assets that have that possibility: real estate, private equity and venture capital funds, exchange-traded products, and many others.
The foundations of a tokenized future are already in the works. Several financial institutions have launched proofs of concept (PoCs) and have joined industry consortia that are dedicated to developing rigorous cross-industry standards, practices, and solutions to explore the benefits of tokenization
So, what are the benefits of tokenization in financial services?
- The introduction of new financial products and services would be possible thanks to the digital representation of conventional assets that traditionally have been illiquid; or through the creation of new digital assets represented as tokens, such as nonfungible tokens (NFTs).
- Tokenization is likely to help reach new customers thanks to its ability to allow for fractional trading in illiquid assets. These assets might include real estate, artwork, or other valued collectibles. Moreover, tokenization could allow investors themselves to gain access to markets previously closed to them.
- Tokenization offers the possibility of new operational efficiencies. That’s because the process would in all likelihood be anchored to a ledger that facilitates smart contracts. These in turn serve to automate and streamline the trading of the underlying assets and facilitate the flows of programmable funds. Furthermore, tokenization could support improvements to the legacy infrastructure of financial services companies.
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Source - Deloitte
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