Tokenization is changing the world, from finance to art
For years, industry leaders, skeptics and enthusiasts have questioned whether blockchain would ever be adopted by mainstream institutions, and if so, when? Well, that day has come and gone, thanks in large part to the ability to tokenize on-chain assets. Blockchain technologies are now playing an important role across industries, driving businesses forward. In financial services in particular, blockchains make a huge difference in reducing friction, improving efficiency and reducing costs.
Asset tokenization is the process by which a digital representation of an asset is created on a blockchain and used to verify and track the asset’s authenticity and ownership history. This technology can be applied to virtually any asset, including securities, real estate, art, and much more. The value of tokenization lies in the application of the trustless and efficient record-keeping capabilities of a blockchain to any asset in the physical world.
Tokenization is already making waves in mainstream circles, with financial powerhouses such as Blackrock, Goldman Sachs, BNY Mellon and JP Morgan all implementing blockchain technology into their operations in a number of interesting and innovative ways. The tokenization of asset classes opens new doors to further increase efficiency in capital markets, shorten transaction and settlement times, while improving costs and increasing access for investors of all kinds.
Tokenized assets in the chain allow access to liquidity in the market while increasing the freedom and access for investors to form and participate in capital markets. Traditionally illiquid assets, such as real estate or art, can have their value unlocked through the tokenization process, opening the door to huge opportunities for new investments. For example, a recent report published by Boston Consulting Group outlined how Asia’s largest private market exchange, ADDX, has begun to do this by using programmable smart contracts built on the blockchain to tokenize and fractionalize multi-asset securities including private equity, hedge funds, bonds and even pre-IPO companies. By using customizable smart contracts, ADDX has been able to overcome the intricate manual processes previously required when handling complex transactions, while opening up the possibility for smaller investors to take part in said transactions.
Fractionalization is a key aspect of tokenization that allows shares of any item, through its token, to be split into smaller parts, effectively spreading and democratizing access to those assets. Fractionalization provides a new way for more investors than ever before to access these financial tools and opportunities.
Arguably the most relevant problem facing modern markets and customers worldwide is the incredibly high amount of friction that exists across our financial infrastructure. Asset tokenization alleviates this friction, making financial institutions and infrastructure far more efficient in terms of time, cost and labor, while increasing access to capital markets. The friction currently plaguing our global financial rails is one of the biggest barriers to capital formation and wealth growth, and in many cases prevents smaller investors from participating. However, thanks to the cost reduction due to eased friction facilitated by blockchain technology and fractional assets, less wealthy investors will now be able to explore and participate in new investment opportunities that would have traditionally been unavailable to them.
Investment banking giant Goldman Sachs has also been very successful in using blockchain technology to improve its existing financial infrastructure. In a recent Wall Street Journal article written by CEO David Solomon, Solomon discussed how Goldman Sachs arranged a $125 million two-year digital bond for the European Investment Bank with two other banks, all based on a private blockchain. Without tokenized assets on the chain, a transaction of this magnitude would take five days to settle. However, settlement took only 60 seconds after the bond was tokenized on a private blockchain. The ability to reduce settlement time can, and will, reduce costs worldwide for all market participants, including banks, customers and regulators, ultimately making markets incredibly more efficient.
The rapid proliferation of tokenized assets across industries in recent years is a clear sign that this technology is here to stay. However, there are still some challenges that stand in the way of even wider adoption.
One such problem is the technical difficulties in creating these platforms. Cryptography is not an easy discipline to learn, and creating permissioned and private blockchains for enterprise use is a huge task. This level of difficulty, and the relatively new technology used, makes it difficult for managers at established institutions to update their already profitable systems and businesses with new instruments that they may not fully understand. But now that a handful of influential business leaders across global markets have proclaimed their own major successes with this technology, the rush to follow suit is on. Even global governments, notoriously the most difficult institutions to change, are frantically looking to tokenize their national currencies through the creation of central bank digital currencies.
Institutions from banks to governments all over the world have wide access to the most amazing transaction machinery that mankind has yet to develop. We can buy and sell literally anything on the blockchain. This technological development paves the way for an equally exciting development in financial services – one that benefits users on both ends of every transaction. The benefits of this technology are staggering, and as adoption of blockchain technology continues to evolve and spread across institutions, we can continue to look forward to the new ways innovators will implement tokenization platforms to solve their complex business challenges.