In 2021, Citibank's Managing Director of Customer Operations, Tony McLaughlin, expressed confidence that tokenization will be the future of the finance and payments industry. In his opinion, the updated infrastructure of financial services using tokens can surpass the current payment and settlement models. The same idea is supported by many other financial analysts and representatives of banks.
For a long time, the stumbling block for adopting cryptocurrencies was their high volatility. It was difficult to use Bitcoin, Ethereum, and other cryptocurrencies as means of payment, as their value could change dramatically within one day. Still, with the advent of tokenized assets, the financial sector is seeing more and more benefits in such technologies.
What is tokenization in finance?
Tokenization means adding digital rights to the blockchain in the form of tokens. Unlike cryptocurrencies, the value of a token is tied to the value of a particular asset. A token can be created for tangible or intangible assets, from diamonds to company shares. Blockchain provides many benefits that cannot be achieved with traditional securitization. For example, any company can issue its shares on the blockchain and raise funds from interested investors worldwide – quickly, safely, and transparently.
With tokenization, assets are no longer stored in private ledgers. Blockchain is an open ledger that is available to users at any time. This gives more opportunities for effective interaction between financial institutions of various types. In particular, balances are updated automatically, and transactions can occur anytime, not just during banking hours.
How will the financial industry change under the influence of tokenization?
Now that we understand what tokenization is in finance, it is time to look at the benefits of new technologies for banks and the market as a whole.
Although this advantage of asset tokenization in finance is not yet obvious, it does exist. A significant decrease in all transactions carried out through the blockchain using tokens is expected in the next few years. Cashlink Technologies and Finoa expect 35% to 65% cost savings along the entire value chain.
The benefit becomes more apparent when considering the entire life cycle of an asset. Tokenization in finance allows significant savings in the issuance, storage, and trading of assets. In addition, many processes are automated and do not require the intervention of a third party, which also allows additional savings.
Thanks to the blockchain, everybody can directly trade tokens. Investors have 24/7 access to exchanges and can complete any trades in seconds. Decentralized trading exchanges do not yet have clear regulations but have great potential. Therefore, it can be expected that regulated platforms will soon present even more solutions in this niche.
Thus, tokenization simplifies transactions for individuals and provides additional benefits for banks. In the same way, they can trade the tokenized assets of their clients on the blockchain more reliably and quickly.
Also, tokenization gives more opportunities for non-bankable assets. Traditionally, these assets (such as corporate shares, construction in progress, etc.) can only be securitized at a very high cost through conventional financial tools. With tokenization in finance, it is possible to reduce costs or make some of these assets bankable, increasing the number of assets under bank management.
New horizons for banks
In the traditional banking system, an issuing bank is required. It charges a commission for transaction costs and reservations. On the other hand, tokenization doesn't require intermediaries since tokenized assets' issuance can be automated. Tokens are issued on the blockchain and stored there, so there is no need to cover additional costs.
Those banks accepting the game's new rules in time and embracing tokenization in finance will open up new opportunities for themselves. In particular, thanks to the blockchain, they will be able to issue assets cheaper, which will also benefit their customers. Banks will also be more affordable to store their customers' tokenized assets than traditional ones, as creating a digital wallet is more cost-effective than opening conventional bank accounts.
Banks will find themselves in a new promising market by developing the sphere of tokenized assets. Today, many people already own digital assets and store them in personal crypto wallets. But banks can also offer digital asset management and a new revenue stream.
What is tokenization in finance? It creates a common open registry on the blockchain, where digital rights to various objects are added, including shares and derivatives. Thanks to tokenization finance, banks get more opportunities to interact with each other, reducing costs. Asset securitization becomes more profitable for banks as it becomes possible to get rid of multiple intermediaries. In addition, due to the low cost of issuing assets, they become more liquid.
The end consumer ― the bank's customer ― also benefits from lower maintenance costs, secure storage of tokenized assets, and the ability to share asset management decisions with the bank. We are also getting closer to the point where dividend and interest payments will be automated, and self-managed funds will become more widespread.
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